Source: www.breakingviews.com is Europe's leading financial commentary service
Date: July 2003
By Mike Monnelly
Companies are selling convertible bonds by the bucket load. And investors are snapping them up as if they are going out of fashion. Can both be right?
May was a phenomenal month for the convertibles market. US companies raised $12.5 billion, the highest monthly total in a year and a half. Europe had its second best month over this period, with sales of $5.5 billion. Low interest rates, narrowing credit spreads and a fairly high level of volatility on the stock market have produced ideal conditions for launching convertibles.
Nevertheless, some of the deals have been done on unbelievably advantageous terms - for the issuers. Take April's $750 million deal from US internet portal Yahoo! Not only do the bonds pay no interest, investors must pay a 68% premium to convert them into stock. Or consider last month's deal from German engineer Siemens. It pays a 1.4% coupon, half the dividend yield of the ordinary shares, and is convertible at a 46% premium.
It is easy to see why companies are printing these bonds as fast as they can.