With margins shrinking in traditional capital-raising areas in the emerging markets, banks have to look farther afield to make money. One product that is beginning to whet bankers’ appetites is convertible bonds.
The instrument is not new to the emerging markets, but historically issuance has been spotty. In India and Taiwan, for example, convertibles are a common tool for corporate and bank fund-raising. In emerging Europe and the Middle East, however, borrowers have been less willing to dip their toes in the convertibles water, and the product does not exist in Latin America.
There are signs that the situation is changing, especially in emerging Europe and the Middle East. Already this year a handful of deals have been priced out of the region, including transactions by Hungary’s Mol, Russia’s Mechel, Egypt’s Weather Investments and the UAE’s Dubai Ports World. Some transactions have been more successful than others but at least the indication is that the product is hitting corporates’ radar screens.
Certainly, the environment has never been more supportive for convertible bonds. With central banks tightening monetary policy, financial market volatility has returned. In addition, economic fundamentals remain strong in much of the region.