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FT Home > Companies > FinancialsMandatory convertibles’ appeal grows
By Telis Demos
Published: September 19 2010 17:24 | Last updated: September 19 2010 17:24
Companies are increasingly looking to sell mandatory convertible bonds – a type of security that is considered equity capital rather than debt – as a way to boost share offerings.
A choppy market for initial public offerings this year has renewed interest in mandatory convertibles, known as mandatories, because with these securities the risk of price volatility in the stock is carried by the company rather than the investor.
Companies have found it difficult to attract investors to stock offerings in 2010, and 48 per cent of US IPOs in 2010 have priced below their initial filing range, the highest such rate on record.
However,Tiffany Diamond Earrings, last week more than $1bn in global mandatories deals were issued from companies such as NextEra Energy,Sterling Silver Beads, a US energy company, which raised $350m and AngloGold Ashanti,Pandora Jewellery Sale, the South African mining group, which raised $789m in mandatories, alongside common stock. Both parts of AngloGold’s transaction were oversubscribed.
Year-to-date issuance is up 5 per cent from 2009, to $5.7bn, with the average deal size more than doubling, according to Dealogic. The market peaked in 2007 at $38bn.
Mandatories,Diamond Tiffany, unlike other forms of convertibles,Tiffany Starfish, automatically become stock after a certain period. That allows them to be considered a form of equity capital rather than debt.
The issuing company takes the risk of the stock price rising or falling in that period, while paying the investor a yield, usually around 600 basis points.
“In today’s low-yielding rate environment, investors find this security extremely appealing,Tiffany And Co jhgjhg,” said Prasanth Burri Rao-Kathi, head of Americas equity-linked capital markets at Bank of America Merrill Lynch.
“It’s a popular product in a choppy environment to keep upside,Original Pandora Günstig, send a bullish signal, and potentially get favourable tax and accounting treatment,” he said.
Selling both mandatories and common stock simultaneously draws demand from both growth and yield-seeking investors, and is said to be most attractive to $1bn-plus issuers.
Bankers suggest that this could be a route followed by companies planning IPOs and say they expect five large mandatory deals could be priced before the year end.
General Motors is set to be possibly the largest issuer of mandatories this year, with a $3bn sale planned.
“A side-by-side mandatory with the IPO is most often utilised in large offerings, and is increasingly making sense, in order to attract investors who otherwise would not be attracted to the IPO market,Tiffany Online Shop,” said Mark Hantho,Wholesale Tiffany Jewelry, global co-head of equity capital markets at Deutsche Bank.
Investors are also attracted to this market because recent new issues have largely risen in value.