Capital Markets

Convertibles Blow the Top Off in ’07

Lower costs for companies, hefty fees for underwriters, and attractive results for investors combined to make this year a record-setter for convert...
Stephen TaubDecember 28, 2007

Sales of convertible bonds set a record in 2007. More than 800 companies raised at least $183 billion from convertible debt, up 47 percent from the previous year, according to a count by Bloomberg.

Investors who scooped up this paper aren’t regretting it, either. According to the wire service, convertible bonds returned 8 percent on average, compared with 5.6 percent for the Standard & Poor’s 500 and an average 2.5 percent for corporate bonds. Investors were willing to plunk down record sums on convertibles in large part due to the uncertainty in the overall market.

Corporate issuers favored the bonds this year — which investors can convert into common stock under certain conditions — because they typically can save companies a few percentage points in interest compared with normal corporate bonds. Indeed, offshore oil and gas drilling giant Transocean Inc. recently saved nearly $350 million in annual interest by selling $6.6 billion of 30-year convertible debt rather than bonds.

Wall Street underwriters also are big fans of the securities since the average fees are around 2.16 percent, according to Bloomberg. “The convertibles market feeds on uncertainty, nervousness and volatility,” Viswas Raghavan, head of international capital markets at JPMorgan Chase & Co. in London, told the wire service. “Right now, it’s the hottest market out there.”

Bloomberg points out that the convertible market last peaked in 2003, with $162 billion of sales, and then more than halved by 2005. JPMorgan was the biggest underwriter of convertible securities in 2007, earning about $549 million for brokering the convertible sales, according to the wire service.

Traditional institutional investors are not the only big buyers of this paper. In November Citigroup raised $7.5 billion from Abu Dhabi Investment Authority when it sold securities that convert into as much as 4.9 percent of its stock.