Barclays urges firms to tap Europe FCCB mart

There is increasing investor appetite for convertible bonds, with a pool of about $25 billion of dedicated convertible bond funds in Europe awaiting opportunities.

"Investors are keen to invest in new names. With FCCB issues in Asia having made a strong start in the year, investors have exhibited a strong appetite for overseas issuers," said Douglas Decker, director of Barclays Capital, the investment banking arm of Barclays Bank.

The appetite for issues from outside Europe today is very strong. India is among the top countries being looked at for origination of a larger number of foreign currency convertible bond (FCCB) issues.

In the first half of the current calendar year, of the 25 issues raising funds from overseas, 24 issues aggregating $1.59 billion raised funds through the FCCB route.

Barclays Capital managed seven FCCB issues during January-June 2005, of which three were from India. These included Amtek Auto's $150 million, Jaiprakash Industries' $100 million and Mercator Lines' $60 million.

Decker said a couple of large FCCB issues (ranging from $400 million to $500 million) are among the overseas convertible bond issues in the offing from India.

The high liquidity in the dedicated convertible bond funds has been caused by the high redemptions in 2004 as investors chose not to convert their bonds into equity.

"Almost 90 per cent of the $30 billion convertible bond issues made in 2000 and 2001 have not been converted into equities as the stock prices of the issuers were far below the contracted conversion prices," he said.

The current market situation in India offers investors a better chance of converting their bonds into equity. The high price volatility is seen as being favourable for issuers.

"The more the volatility, the higher is the chance of the issuer's stock price reaching the conversion level," Decker said.

The convertible bond funds are also seen diversifying their exposure subscribing to small portions in each of the issues.

In issue sizes of $50 to $100 million, subscriptions by these funds have ranged from $3 to $5 million. In bigger issues of $500 million, the subscription trend has been similar.

The flexibility in structuring convertible bonds has allowed issuers to access the eurodollar markets even in the face of significant market turmoil in the second quarter of 2005.