SG builds in convertible hedging despite lack of origination, Collins says

By Peter Heap

New York, March 26 - SG Americas has been able to build a derivatives business linked to new convertible bond deals - even though it lacks origination capability, according to Michael Collins, managing director and head of corporate and high net worth equity risk management at the firm.

SG specializes in convertible note hedge and warrant transactions and has built a flow of deals by both competing against and working with the investment banks that are bringing convertibles to market.

"Historically the bookrunners on the convertible bond would always arrange to do the derivative trade," Collins told the Structured Products Association's 2007 conference in New York Monday.

"What we do, and very successfully, is to say to issuers" that they need an independent view on the appropriate pricing for the transaction.

In times past, bookrunners also brought in outside firms to take a small piece so that they could use mark to market pricing.

But increasingly the banks are looking to spread the risk and SG has gotten involved.

"They are very happy to have us to basically syndicate the deal," Collins noted.

For issuers, these hedge transactions, which effectively raise the conversion price of a new deal, are very appealing. There were 45 last year and 15 already in 2007, Collins said.

"There is a very strong accounting and tax rationale for companies to do this," he added.

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