Europe convertible issuance cost rises to highest since April 2005 on rising euro swap rate, says Barclays

By Kenneth Lim

Boston, April 5 - The cost of issuing convertible bonds in Europe rose in March to its highest level since April 2005 and could increase further, Barclays Capital's convertibles research team said in a report.

The Barclays Convertible Cost Index gained 31 basis points in March to 3.28%, fueled by a sharp rise in euro swap rates, wrote analysts Luke Olsen, Haidje Rustau and Heather Beattie.

The index refers to the implied coupon at issue of a hypothetical five-year euro BBB convertible bond with a 40% conversion premium and no calls or puts. A lower index favors issuers, who can price new convertibles at lower coupons.

Five-year euro swap rates increased 32 bps in March as stronger economic indicators pointed toward accelerated rate rises, the analysts said. Five-year euro swap rates were about 3.8% at end-March, the highest levels since June 2004.

The analysts expect the index to move up a further 7 bps in April to 3.35% on the back of a 6 bps gain in euro swap rates. They also forecast a 20 bps increase in long-dated Euro Stoxx 50 option implied volatility for the month.

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