After a difficult end to 2001, CFOs in Europe began 2002 amid predictions that a backlog of postponed deals would kick-start investment activity. Instead, corporate scandals, falling asset prices and weakening investor confidence have left CFOs facing the worst deal- making environment in years. “The lack of confidence has continued,” says Heino Teschmacher, co-head of M&A at UBS Warburg. “People were saying that 2002 would be better, but in general terms that just hasn’t happened.”
For evidence take a look at the equity-linked bond market. Exchangeables and convertibles had been hot in 2001, rising in value from E31 billion in 2000 to E50 billion, according to Dealogic, a provider of financial data, and there was enough reason to believe that their popularity among corporate financiers would continue in 2002. Zurich Financial Services, German chip maker Infineon Technologies and Publicis, a French advertising and media services conglomerate, all thought so and went to market with equity-linked bond issues in January.
There were even some bold variations of traditional equity-linked deals. For example, Zurich’s index-linked bond, dubbed Market Index-Linked Exchangeable Securities (or Miles), involved issuing three-year securities linked to the performance of Switzerland’s SMIC share index. (See Dealwatch, February 2002.) Investors could choose to convert the securities into new Zurich shares six months after the launch of the issue or wait until they were converted automatically on maturity.
The number of shares issued depended on how the firm’s shares perform in relation to the SMIC index. If Zurich’s performance matched the index, the company would issue 1.5m new shares. But if Zurich’s stock price under- or out-performed the index, the number of new shares issued would fall or rise—up to a maximum of 3m, or 3.6% of total capital. The better Zurich’s share price performance relative to the index, the less its equity base would be diluted.
When the SFr600m (E415m) deal was launched in January, Zurich’s then-CFO Günther Gose swooned that Miles “strengthens our balance sheet by increasing our equity, provides liquidity and reflects our confidence.”
By summer, however, that confidence began to evaporate. Zurich’s share price tumbled 25% in early July to SFr210 as the financial-services sector fell out of favour with investors. What’s more, concerns grew about the dilution of Zurich’s shares as the date at which investors could convert their Miles approached, further weakening Zurich’s share price. In September, a company press release announced that “substantially all of [the Miles] have been exchanged into new shares.”
Other companies have also grown disillusioned with convertibles. British utility International Power, for example, is among the companies that issued short-dated convertible bonds at the height of the stockmarket boom and is now preparing for cash pay-outs as share prices remain in the doldrums. IP’s convertible bond issued in November 2000 includes a put option, which is likely to be exercised in November 2003 unless its share price increases significantly in the coming months. David Crane, CEO at International Power, told reporters in October that the company now assumes that bonds will have to be repaid to the tune of E353m.