European convertible issuance costs fell in February but will rise in March, say Barclays analysts

By Kenneth Lim

Boston, March 1 - An index measuring the cost of issuing convertible bonds in Europe fell by 11 basis points in February on the back of higher long-term option-implied volatility, but coupon levels could rise again in March as swap rates increase, said the convertible research group at Barclays Capital.

The Convertible Cost Index - an implied coupon on a hypothetical five-year, non-callable, no-put, euro BBB convertible bond with a 40% conversion premium - fell to 2.97% at the end of February, wrote analysts Luke Olsen, Haidjie Rustau and Heather Beattie in a research note.

"The CCI peaked briefly at 3.16% on 1 February...its highest level since May 2005. However, since the start of February, long-term implied volatility has increased, offsetting wider euro BBB credit spreads and higher five-year swap rates, pushing the CCI down," the analysts wrote.

"European new issuance witnessed renewed signs of life in February with four new issues launched, among them ST Microelectronics' $927.7 million zero-coupon convertible due 2016, the largest new convertible bond issue in Europe since France Telecom's €1.15 billion deal in September 2004," they added.

In February, long-dated Euro Stoxx 50 Index option-implied volatility rose from 18.9% at the start of the month to 20.2% by its end, driven by strong spot moves, the analysts said. Five-year euro swap rates rose 5 bps to 3.43%, the highest level since October 2004, while mergers and acquisitions drove credit spreads up 5 bps to 80 bps. Dividend yields, meanwhile, slid 6 bps.

The analysts expect the index to bounce back in March by 10 bps to 3.07% despite predicting that volatility levels will continue climbing to 20.5% by end-March. Offsetting the volatility increase will be rising five-year swap rates, which are forecast to reach 3.6%, and event risks that see investment-grade credit spreads at fair value, the analysts said.

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