barcap_convertible outlook q22010
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CONVERTIBLE BOND RESEARCH EMEA and Asia Pacific | 5 April 2011
Barclays Capital does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by research analysts based outside the US who are not registered/qualified as research analysts with FINRA. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 37
CONVERTIBLE OUTLOOK Q2 2011 EMEA and Asia Pacific: More to come
Q2: We expect more… Convertible performance: Our strategists continue to forecast positive returns for
developed market equities and HY credit, albeit our global risk stance is now more cautious. In our 2011 Convertibles Outlook, we projected 9-10% returns for EMEA and Asia Pacific convertibles using these forecasts. Most of this potential upside remains.
New issuance: Rising equities and rates should boost convertible supply, helped by rich existing valuations, more M&A and the ongoing loan-to-bond financing shift.
Bond redemptions: We estimate €7.7bn more redemptions in EMEA and $17.6bn in Asia Pacific for 2011. March to May looks fairly heavy for Asia Pacific maturities.
Market volatility: We anticipate more periods of heightened market concern around inflation, policy normalisation, euro area debt and geopolitical tensions. During such periods, we expect convertibles to outperform equities.
Corporate activity: We expect M&A to pick-up, potentially providing more ratchet opportunities for investors, as well as further new issuance.
External interest: Particularly from fixed-income investors seeking equity kickers to enhance the now more meagre yields from straight credit markets.
Q1: How did we fare? Convertibles returned 2.8% in EMEA, 0.7% in Asia ex-Japan and 0.7% in Japan in
Q1, according to the Barclays Capital Convertible Indices. The Tohoku earthquake, MENA unrest, inflation and sovereign concerns all weighed on performance.
Implied volatility rose by 3.8% in EMEA to 31.7%, rose 1.5% in Japan to 31.4% and was unchanged in Asia ex-Japan at 31.8%, based on our Convertible Index vega-weighted averages. Convertible valuations also richened versus options and realised volatility, as measured by credit-calibrated implied volatilities, particularly in EMEA.
Net supply was slightly negative in EMEA with issuance of €3.7bn and redemptions of €3.8bn, and in Asia Pacific with issuance of $2.1bn and redemptions of $2.9bn.
Key themes We provide thoughts on strategic convertible positioning for Q2; volatility relative
value; rho screening; Indian FCCB redemptions; upside in callable convertibles; the chase for yield; the potential for CoCoCos; new models and new issue pricing in CB Insight™; and the latest addition to our family of Convertibles Indices – Asia Pacific.
CB InsightTM
https://live.barcap.com/keyword/CBINSIGHT
Our online convertibles portal, providing interactive analytical tools, market data and research
Luke Olsen
+44 (0) 20 7773 8310
Angus Allison
+44 (0) 20 7773 5379
Heather Beattie, CFA
+44 (0) 20 7773 5859
www.barcap.com
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Barclays Capital | Convertible Outlook Q2 2011
5 April 2011 2
CONTENTS
CONVERTIBLE MARKET REVIEW Q1 2011 3 Convertibles performance: Cross-asset perspective .......................................................................... 3 Convertibles performance: Global perspective.................................................................................... 6 EMEA convertibles universe profile........................................................................................................ 8 EMEA convertibles new issues ................................................................................................................ 9 EMEA convertibles net supply and action dates ...............................................................................11 Asia Pacific convertibles universe profile............................................................................................12 Asia Pacific convertibles new issues ....................................................................................................13 Asia Pacific convertibles net supply and action dates .....................................................................15 High yield supply: Still booming, but silver linings for convertibles..............................................17
CONVERTIBLE THEMES Q2 2011 18 Pan-asset class strategy views for Q2 2011 ......................................................................................18 Recommendations...................................................................................................................................20 2011 return projections: Most potential upside remains................................................................23 Volatility relative value: Now rich in both regions.............................................................................24 Screening for rho: Less is more.............................................................................................................27 Indian FCCBs: A maturing market ........................................................................................................28 Callable bonds: More potential upside than meets the eye............................................................29 High-yielding convertibles: Yieldscape™............................................................................................31 CoCoCos: Are three “Cos” better than two? ......................................................................................33 CB InsightTM: Now with choice of models and new issue pricer....................................................34 Barclays Capital Convertibles Indices: Asia Pacific launched .........................................................36
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Barclays Capital | Convertible Outlook Q2 2011
5 April 2011 3
CONVERTIBLE MARKET REVIEW Q1 2011
Convertibles performance: Cross-asset perspective
EMEA convertible performance versus credit and equity Year-to-date EMEA convertibles have returned 2.8%, versus 0.6% for a broad measure of equities, the STOXX 600 index. Both returns are measured on a total-return basis. The returns for our IG credit and HY credit indices were 0.0% and 2.2%, respectively. The volatility of convertible returns was 6.3% and for equities, 13.6%.
Figure 1: Performance of EMEA convertible, credit and equity indices in Q1 11
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96
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100
102
104
106
108
31Dec
07Jan
14Jan
21Jan
28Jan
04Feb
11Feb
18Feb
25Feb
04Mar
11Mar
18Mar
25Mar
Euro-Aggregate: Corporates PE HY 3% Cap ex-Financials
EMEA Convertibles: Composite Stoxx600
Note: Rebased to 100 at 31 Dec 2010 and measured until 31 March 2011. Source: Bloomberg, Barclays Capital
Top and bottom-performing EMEA convertibles in Q1 11
Figure 2: Top and bottom EMEA convertible performers in Q1 11
Top convertible performers
Issue Closing
Price Q1 % chg
Q1 % DN chg Parity
Q1 % chg
Conversion premium Q1 chg Crncy
Amt out (mn)
Bulgari 5.375% 2014 294.3 65.4 21.0 247.1 51.3 19.1 10.2 EUR 150
Solon 1.375% 2012 44.5 58.9 58.9 4.9 103.0 815.2 -253.9 EUR 131
Alcatel 5% 2015 4.7 46.6 -0.3 4.1 85.8 16.9 -31.3 EUR 1000
Magnolia Finance - MOL 4% perp 104.8 27.8 10.2 88.8 20.8 18.0 6.4 EUR 610
Q-Cells 6.75% 2015 4.3 26.3 16.2 3.0 21.2 40.1 5.7 EUR 128
Maurel et Prom 7.125% 2015 17.0 24.9 10.8 13.6 28.9 25.3 -4.0 EUR 70
Fortis CASHES 62.3 24.5 24.4 8.4 17.3 643.3 43.3 EUR 3000
Q-Cells 5.75% 2014 83.8 21.8 21.5 15.6 42.9 435.5 -92.9 EUR 250
Soitec 6.25% 2014 12.0 21.2 1.4 10.7 32.6 12.1 -10.6 EUR 145
Opus - OTP Bank 3.95% perp 69.1 21.0 12.4 58.9 15.8 17.3 5.0 EUR 514
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Barclays Capital | Convertible Outlook Q2 2011
5 April 2011 4
Bottom convertible performers
Issue Closing
Price Q1 % chg
Q1 % DN chg Parity
Q1 % chg
Conversion premium Q1 chg Crncy
Amt out (mn)
TUI 5.5% 2014 94.4 -15.6 0.3 84.3 -19.7 12.0 5.4 EUR 218
Clariant 3% 2014 199.0 -12.8 -1.7 193.8 -12.5 2.7 -0.3 CHF 300
International Airlines 5.8% 2014 138.9 -12.0 -0.6 120.1 -16.7 15.7 6.1 GBP 350
Celesio 3.75% 2014 107.8 -6.0 -4.0 77.1 -6.8 39.9 1.3 EUR 350
Air France 4.97% 2015 15.5 -5.3 2.2 11.8 -13.8 31.6 11.9 EUR 661
Sainsbury 4.25% 2014 116.4 -5.0 -2.8 80.1 -10.9 45.2 9.1 GBP 190
Petropavlovsk 4% 2015 107.7 -4.9 -0.8 77.0 -8.7 39.9 5.7 USD 380
International Power 3.75% 2023 272.8 -4.8 1.3 272.5 -6.1 0.1 1.3 USD 228
MTU Aero Engines 2.75% 2012 109.0 -4.5 -2.2 96.7 -5.5 12.7 1.1 EUR 152
ArcelorMittal 7.25% 2014 31.1 -4.4 -0.1 26.6 -6.4 16.9 2.4 EUR 1250
Note: Based on change in closing prices between 31 December 2010 and 31 March 2011. The moves are price moves and do not therefore include coupon returns. Source: Bloomberg, Barclays Capital
Asia Pacific convertible performance versus credit and equity Year-to-date, Asia Pacific ex-Japan convertibles have returned 0.7%, versus 2.1% for a broad measure of equities, the MSCI Asia Pacific ex-Japan index, 0.8% for HY credit (Barclays Capital EM Asia USD Credit Corporate HY index) and 1.2% for IG credit (Barclays Capital EM Asia USD Credit Corporate HG index). The volatility of convertible returns was 5.3% and for equities, 15.5%.
Figure 3: Performance of Asia Pacific ex-Japan convertibles, credit indices and underlying equities in Q1 11
949596979899
100101102103
31Dec
07Jan
14Jan
21Jan
28Jan
04Feb
11Feb
18Feb
25Feb
04Mar
11Mar
18Mar
25Mar
Asia USD Credit Corporate HG Asia USD Credit Corporate HY
Asia ex-Japan Convertibles MSCI Asia ex-Japan
Note: Rebased to 100 at 31 Dec 2010 and measured until 31 March 2011. Source: Bloomberg, Barclays Capital
Year-to-date, Japan convertibles have returned 0.7%, versus -6.2% for the Nikkei stock index and -1.2% for credit (Barclays Capital Asian-Pacific Japan Corporate index). The volatility of convertible returns was 11.2% and for equities, 33.9%.
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Barclays Capital | Convertible Outlook Q2 2011
5 April 2011 5
Figure 4: Performance of Japan convertibles, credit indices and underlying equities in Q1 11
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Japan: Corporates Japan Convertibles Nikkei
Note: Rebased to 100 at 31 Dec 2010 and measured until 31 March 2011. Source: Bloomberg, Barclays Capital
Top and bottom-performing Asia Pacific convertibles in Q1 11
Figure 5: Top and bottom Asia Pacific convertible performers in Q1 11
Top convertible performers
Issue Closing
Price Q1 % chg
Q1 % DN chg Parity
Q1 % chg
Conversion premium Q1 chg Crncy
Amt out (mn)
KCC - Hyundai Heavy Inds 3.5% 2014 262.5 19.4 0.4 262.0 19.5 0.2 -0.0 USD 55
Hynix 2.65% 2015 112.0 12.8 -0.6 93.5 33.2 19.8 -21.7 USD 500
Epistar 0% 2016 111.9 11.9 10.4 80.4 4.5 39.2 9.2 USD 280
Bumi Resources 9.25% 2014 - NEW 128.7 10.8 2.2 113.5 14.3 13.3 -3.6 USD 375
Suzlon Energy 0% 2012 (Oct) 112.0 9.8 10.1 45.9 -18.3 144.2 62.4 USD 121
Soho China 3.75% 2014 128.0 9.0 -1.1 119.1 15.4 7.4 -6.3 HKD 2800
Western Areas 6.4% 2015 122.0 8.5 1.3 102.3 13.2 19.3 -5.2 AUD 125
Suzlon Energy 0% 2012 113.5 8.1 8.2 45.9 -18.3 147.5 60.3 USD 211
China Unicom 0.75% 2015 107.3 6.8 1.1 81.3 16.1 32.0 -11.4 USD 1838
Elpida 0.5% 2015 108.5 5.3 -0.2 87.6 13.3 23.7 -9.4 JPY 60000
Bottom convertible performers
Issue Closing
Price Q1 % chg
Q1 % DN chg Parity
Q1 % chg
Conversion premium Q1 chg Crncy
Amt out (mn)
Paladin Energy 3.625% 2015 99.1 -12.2 0.0 65.9 -25.6 50.4 23.0 USD 300
China Green 3% 2013 84.3 -10.7 -8.6 51.0 -22.2 65.4 21.3 CNY 1350
Oceana 5.75% 2012 96.5 -10.6 3.8 64.4 -26.8 49.9 27.2 AUD 53
Acer 0% 2015 (A) 101.0 -10.3 -6.9 58.6 -34.0 72.2 45.5 USD 300
Videocon 6.75% 2015 86.7 -7.7 0.0 81.3 0.0 6.5 6.5 USD 200
Aurobindo Pharma 0% 2011 (B) 146.0 -7.6 -7.5 112.8 -25.2 29.4 24.7 USD 30
Fufeng Group 4.5% 2015 104.8 -7.4 -0.0 72.5 -22.4 44.5 23.4 CNY 1025
Paladin Energy 5.0% 2013 99.5 -7.3 -2.6 56.6 -25.6 75.6 34.7 USD 325
Takashimaya 0% 2014 101.8 -6.8 -1.8 65.6 -23.7 55.3 28.2 JPY 20000
Olam 6% 2016 129.3 -6.6 -1.3 103.6 -9.3 24.8 3.6 USD 500
Note: Based on change in closing prices between 31 December 2010 and 31 March 2011. The moves are price moves and do not therefore include coupon returns. Source: Bloomberg, Barclays Capital
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Barclays Capital | Convertible Outlook Q2 2011
5 April 2011 6
Convertibles performance: Global perspective
US and EMEA outperformed Asia and Japan, partly explained by FX Year to date, the US convertible index has the highest total return of 5.4%, followed by EMEA 2.8%, Asia ex-Japan 0.7% and Japan 0.7%, as shown in Figure 6. Since the start of 2011, however, the euro has strengthened by 5.6% versus the US dollar while the Japanese yen has weakened by 2.1% (see Figure 8 for details). This suggests that, in US dollar terms, the EMEA index (which is in EUR) would have outperformed the US index, while the Japan index (which is in JPY) underperformance would have been wider. Figure 6 shows that this underperformance occurred in the aftermath of the Tohoku earthquake on 11 March. Otherwise, we attribute the relative outperformance of the US and EMEA indices largely to implied-volatility richening – see section below.
Volatility of daily total returns was greatest for the Japan convertible index, at 11.1%. We attribute this partly to volatility triggered by the Tohoku earthquake and partly to its relatively smaller number of constituents. Prior to the earthquake, the Japan convertibles index returns volatility year to date was 8.7%. The next most volatile convertibles index was the US, at 8.5%, reflecting in its relatively higher delta, 64%. The EMEA returns volatility was 6.7% and Asia ex-Japan was 5.4%. The relatively low returns volatility of Asia ex-Japan convertibles stems partly from the shorter time to maturity/put of many convertibles and partly from its relatively low delta (36%, compared to 46% for EMEA), in our view.
Figure 6: Total returns year to date of the Barclays Capital convertible composite indices: EMEA, Asia ex-Japan, Japan and US
-4%
-2%
0%
2%
4%
6%
8%
03-Jan-11 17-Jan-11 31-Jan-11 14-Feb-11 28-Feb-11 14-Mar-11 28-Mar-11
EMEA Convertibles (176) Japan Convertibles (55)
Asia ex-Japan Convertibles (105) US Convertibles (632)
Note: EMEA index total returns are in EUR, Japan in JPY, Asia ex-Japan and US in USD. Numbers of index constituents are in parentheses. Source: Barclays Capital
US has the highest implied volatility, EMEA and Japan have also richened Figure 7 shows that the US convertible index now has the highest vega-weighted average implied volatility across the regions. This was also the case at the start of 2011, albeit by a small margin over Asia ex-Japan. US convertible-implied volatility now stands at 35.1, well ahead of Asia ex-Japan at 31.8, EMEA at 31.7 and Japan at 31.4. The year-to-date changes in implied volatility are greatest for EMEA (+3.8) and US (+2.9%), followed by Japan (+1.5) and Asia ex-Japan (unchanged) (see Figure 8 for details). Asia ex-Japan started the year more stretched in implied volatility terms than either EMEA or Japan. The year-to-date richening in EMEA and (to a lesser degree) Japan is partly a ‘catch-up’ effect, in our view.
US and EMEA convertible indices outperformed, while Japan
underperformed following the Tohoku earthquake; EUR
strength bolstered EMEA returns for USD-based investors
Volatility in Japan convertible index returns is heightened by
the earthquake and fewer constituents, while lower
volatility in EMEA and Asia is partly attributable to lower delta
EMEA and Japan have richened year to date, closing the implied
volatility gap versus Asia ex-Japan
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Barclays Capital | Convertible Outlook Q2 2011
5 April 2011 7
Figure 7: Vega-weighted average-implied volatilities (%) of the Barclays Capital convertible composite indices: EMEA, Asia ex-Japan, Japan and US
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28
30
32
34
36
03-Jan-11 17-Jan-11 31-Jan-11 14-Feb-11 28-Feb-11 14-Mar-11 28-Mar-11
EMEA Convertibles (176) Japan Convertibles (55)
Asia ex-Japan Convertibles (105) US Convertibles (632)
Note: Numbers of index constituents are in parentheses. Source: Barclays Capital
Figure 8: Summary of Barclays Capital convertible composite indices
EMEA Japan Asia ex-Japan US
Total return year to date 2.8% 0.7% 0.7% 5.4%
Volatility of returns 6.7% 11.1% 5.4% 8.5%
Total return / volatility 0.4 0.1 0.1 0.6
Index currency EUR JPY USD USD
FX rate vs USD 0.7050 82.83 1 1
FX move vs USD ytd -5.6% 2.1% 0.0% 0.0%
Market value of index (bn) 80 2773 41 267
Market value (USD bn) 112 34 41 267
Delta of index (wtd avg) 46% 26% 36% 64%
Impl vol of índex (vega-wtd avg) 31.7 31.4 31.8 35.1
Impl vol change ytd 3.8 1.5 0.0 2.9
Number of index constituents 176 55 105 632
Note: Index data as at 31 March 2011. Source: Bloomberg, Barclays Capital.
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Barclays Capital | Convertible Outlook Q2 2011
5 April 2011 8
EMEA convertibles universe profile The EMEA convertible bond market value as of 31 March 2011 was €87.0bn, compared
with a nominal value of €77.3bn.
Issuance for the quarter totalled €3.9bn from 12 new issues, and there was little change in the overall split in regard to credit composition of the market.
The geographic distribution of our universe remained balanced over the quarter, with France, the UK and Germany dominating.
The relative market value of in-the-money convertibles has increased, that of typical bonds decreased, and there are fewer distressed bonds.
Based on our estimates, the average YTM/P, delta and rho as at 31 March 2011 were 1.1%, 48% and 1.3, respectively. Median YTM/P, delta and rho were 0.7%, 54% and 1.2, respectively. If we use the maximum of YTM/P and running yield instead, the average and median yields were 4.7% and 3.6%, respectively.
Figure 9: EMEA universe market value by country
Figure 10: EMEA universe market value by sector
France23%
UK17%
Germany13%
Belgium5%
Portugal4%
Other33%
Switzerland5%
Mining, Oil & Gas19%
Industrial15%
Banking10%Public
Sector9%
Technology9%
Real Estate7%
Other31%
Source: Barclays Capital Source: Barclays Capital
Figure 11: EMEA universe market value by rating Figure 12: EMEA universe market value by profile
IG34%
NR40%
HY26%
Typical34%
Equity sensitive &
ITM31%
Busted24%
Equity sensitive &
OTM10%
Distressed1%
Source: Bloomberg, Barclays Capital Source: Barclays Capital
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Barclays Capital | Convertible Outlook Q2 2011
5 April 2011 9
EMEA convertibles new issues
Primary markets continue to be constrained by sovereign credit concerns although we still saw examples of opportunistic reduced-cost financing. We continue to believe that swap rate increases, together with M&A funding, could increase the incentive to issue convertibles, at present motivated in part by the richness of the asset class. Figure 16 displays issuance in Q1 2011, and we note:
there was €3.7bn EMEA issuance in Q1 11, of which €0.6bn was investment grade; and
repeat issuers accounted for 58% of new deals, or 40% by volume.
Figure 13: EMEA monthly new issuance (€bn)
0
1
2
3
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec0
2
4
6
8
10
12
14
16
2011 2010 2011 Cumulative (RHS) 2010 Cumulative (RHS)
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2
3
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec0
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4
6
8
10
12
14
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2011 2010 2011 Cumulative (RHS) 2010 Cumulative (RHS)
Source: Barclays Capital
Figure 14: EMEA annual new issuance (€bn)
32.9
52.4
24.1
41.3
14.59.8
19.6
28.7
10.6
22.9
13.9
3.7
0
10
20
30
40
50
60
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Barclays Capital
Performance The average performance of new issues in Q1 11, measured over the first week since announcement, was 1.1% on an outright basis and 1.8% delta-neutral. We modelled the average cheapness as 0.4%.
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Barclays Capital | Convertible Outlook Q2 2011
5 April 2011 10
Figure 15: EMEA convertible new issue performance (one week)
-6
-4-2
02
46
8
Indu
stri
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en1.
875%
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r 4.
25%
2016
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201
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acan
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Lond
onM
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g 8%
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Ship
Fin
ance
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% 2
016
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nico
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% 2
017
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ofin
anz
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% 2
018
TUI 2
.75%
2016
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nhof
fIn
tern
atio
nal
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201
8
Cel
esio
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%20
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Sacy
r 6.
5%20
16
Outright move Delta neutral move Cheapness
Source: Barclays Capital
Figure 16: EMEA new convertible issuance Q1 11
Size Senior unsecured
issuer rating Issue rating
Date Issuer-underlying Country Ccy Coupon Maturity Yield Premium (mn) S&P Moody’s S&P Moody’s
31 Mar Sacyr Spain EUR 6.50% 01 May 2016 6.50% 25.0% 200 NR NR NR NR
29 Mar Celesio Germany EUR 2.50% 07 Apr 2018 2.50% 30.0% 350 NR NR NR NR
10 Mar Steinhoff Sth Africa EUR 4.50% 31 Mar 2018 5.75% 32.0% 450 NR Ba1 NR NR
08 Mar TUI Germany EUR 2.75% 24 Mar 2016 2.75% 30.0% 339 B- Caa1 B- NR
03 Mar Ingenico France EUR 2.75% 01 Jan 2017 2.75% 40..0% 220 NR NR NR NR
03 Mar Immofinanz Austria EUR 4.25% 08 Mar 2018 4.25% 32.5% 515 NR NR NR NR
02 Feb Ship Finance Bermuda USD 3.75% 10 Feb 2016 3.75% 35.0% 125 BB Ba3 NR NR
31 Jan London Mining UK USD 8.00% 15 Feb 2016 8.00% 38.0% 110 NR NR NR NR
25 Jan Pierre et Vacances France EUR 4.00% 01 Oct 2015 4.00% 25.0% 115 NR NR NR NR
19 Jan CGGVeritas France EUR 1.75% 01 Jan 2016 1.75% 25.0% 315 BB- Ba3 NR NR
18 Jan Essar Energy UK USD 4.25% 01 Feb 2016 4.25% 30.0% 500 NR NR NR NR
11 Jan Industrivarden Sweden EUR 1.88% 27 Feb 2017 1.88% 35.0% 550 A NR NR NR
Note: Ratings at time of issue. Source: Bloomberg, Barclays Capital
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Barclays Capital | Convertible Outlook Q2 2011
5 April 2011 11
EMEA convertibles net supply and action dates
Q1 11 realised issuance We calculate that Q1 11 saw:
€3.7bn of issuance; and
€0.6bn of IG issuance.
Q1 11 realised redemptions We calculate that Q1 11 saw:
€3.8bn of redemptions, resulting in negative net supply of €0.1bn; and
€0.8bn of IG redemptions, resulting in negative IG net supply of €0.2bn.
Remainder of 2011 redemption projection Projecting ahead for the remainder of 2011, we estimate that, all else equal, there could be:
€7.7bn of redemptions, requiring €0.9bn of issuance per month for flat annual supply; and
€1.0bn of IG redemptions, requiring €0.1bn of issuance per month for flat IG annual supply. This looks a particularly modest total, so although we are not expecting heavy IG convertible deal flow in 2011, it will not require much to see positive net supply.
Figure 19: Potential redemptions and key action dates for Q2 11
Name Price Parity Red amt (€mn) Action date Action
LLB 1.65% 2011 101.3 62.8 206 12 April Maturity
EM. TV 5.25% 2013 5.3 2.4 88 18 April Put notice
3i 3.625% 2011 100.2 38.1 158 29 May Maturity
Subsea 7 2.8% 2011 107.4 105.3 170 30 May Final conv.
La Caixa - Criteria 3.5% 2011 100.4 88.5 838 6 June Final conv.
Rallye - Casino 3.25% 2013 95.5 73.2 357 24 June Put notice
Note: Prices as of 1 April 2011. Redemption amount is at greater of parity and redemption price. Source: Barclays Capital
Light IG redemptions in 2011 bode well for positive net supply
Figure 17: 2011 issuance versus redemptions (€bn)
Figure 18: 2011 IG issuance versus redemptions (€bn)
-2.5
-2.0
-1.5
-1.0
-0.5
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2.5
Jan Mar May Jul Sep Nov
Issuance Conversion Buyback Maturity Call Put
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
Jan Mar May Jul Sep Nov
IG issuance IG redemptions
Note: Q2-Q4 redemptions are scheduled according to current levels; Q2-Q4 Issuance is average required for the full year to exhibit flat net supply. Source: Barclays Capital
Note: Q2-Q4 redemptions are scheduled according to current levels; Issuance is average required for the full year to exhibit flat net supply. Source: Barclays Capital
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Barclays Capital | Convertible Outlook Q2 2011
5 April 2011 12
Asia Pacific convertibles universe profile
The Asia Pacific convertible bond market’s value is currently $80.4bn, relative to a nominal value of $72.8bn. In Japan, this total only includes active names.
In terms of profile, the proportion of typical and equity-sensitive bonds is unchanged over the quarter, due in part to the paucity of new issuance.
Based on our estimates, the average YTM/P, delta and rho as at 31 March 2011 were 2.4%, 35% and 1.5, respectively. Median YTM/P, delta and rho were 5.3%, 37% and 1.5, respectively. If we instead use the maximum of YTM/P and running yield, the average and median yields are 5.3% and 2.8%.
Figure 20: Asia Pacific universe market value by country
Figure 21: Asia Pacific universe market value by sector
Hong Kong19%
Japan19%
Japan Domestic
18%
Singapore12%
India12%
Republic of Korea
5%
Other15%
Technology20%
Industrial19%
Real Estate18%
Food and Retail10%
Telecoms7%
Mining, Oil & Gas
7%
Other19%
Source: Barclays Capital Source: Barclays Capital
Figure 22: Asia Pacific universe market value by rating Figure 23: Asia Pacific universe market value by profile
NR65%
IG30%
HY5%
Busted36%
Typical35%
Equity sensitive &
ITM23%
sensitive & OTM6%
0%
Source: Bloomberg, Barclays Capital Source: Barclays Capital
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Barclays Capital | Convertible Outlook Q2 2011
5 April 2011 13
Asia Pacific convertibles new issues
Figure 24 displays issuance in Q1 11, and we note:
as of 31 March there was $2.1bn Asia Pacific issuance from eight deals.
Only one of the issuers is rated by S&P or Moody’s, CapitalMall Trust at A2. However, Yamato is rated AA- by R&I. Also, Bangkok Bank, which is rated BBB+/Baa1, provided a letter of credit for the principal amount and 7.5 months of interest for the BTS convertible and JP Morgan Chase Bank provided a letter of credit for the Tatung convertible.
Figure 24: Asia Pacific monthly new issuance ($bn)
0
1
2
3
4
5
6
7
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec0
2
4
6
8
10
12
14
16
2011 2010 2011 Cumulative (RHS) 2010 Cumulative (RHS)
Source: Barclays Capital
Figure 25: Asia Pacific annual new issuance ($bn)
9.9
21.7
29.0
12.29.1
14.7
2.1
0
5
10
15
20
25
30
35
2005 2006 2007 2008 2009 2010 2011 YTD
Source: Barclays Capital
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Barclays Capital | Convertible Outlook Q2 2011
5 April 2011 14
Asia Pacific convertible bond new issue performance Our analysis shows that the average performance of new issues in Q1, measured over the first week since announcement, was 1.9% on an outright basis increasing to 2.6% on a delta-neutral basis. This compares with 1.4% and 2.8%, respectively, for 2010. In terms of cheapness, we calculate using our assumptions the average cheapness in Q1 is 0.3%. We found on average new issues in 2010 to be 1.3% cheap.
Figure 26: Asia Pacific convertible new issue performance (one week)
-6
-4
-2
0
2
4
6
8
Epis
tar
0%20
16
BTS
1%20
16
Asi
aC
emen
t -
FEN
C 0
%20
16
Yam
ato
0% 2
016
IHI 0
%20
16
Cap
itaM
all
Trus
t2.
125%
2014
Tatu
ng 0
%20
14
Tsin
lien
-Ti
anjin
1.25
%20
16
Outright move Delta neutral move Cheapness
Source: Barclays Capital
Figure 27: New convertible issuance Q1 11
Senior unsecured
issuer rating Issue rating
Date Issuer-underlying Country Ccy Coupon Maturity Yield Premium Size (mn) S&P Moody’s S&P Moody’s
31 Mar Tsinlien - Tianjin Hong Kong CNY 1.25% 13 Apr 2016 1.25% 32.0% 1311 NR NR NR NR
22 Mar Tatung Taiwan USD 0.00% 25 Mar 2014 0.00% 20.0% 150 NR NR NR NR
11 Mar CapitaMall Trust Singapore SGD 2.13% 19 Apr 2014 2.13% 24.0% 350 NR A2 NR NR
11 Mar IHI Japan JPY 0.00% 29 Mar 2016 -0.50% 35.4% 23,000 NR NR NR NR
17 Feb Yamato Japan JPY 0.00% 07 Mar 2016 -0.50% 40.7% 20,000 NR NR NR NR
21 Jan Asia Cement-FENC Taiwan USD 0.00% 27 Jan 2016 0.00% 30.0% 375 NR NR NR NR
19 Jan BTS Thailand THB 1.00% 25 Jan 2016 1.00% 13.0% 10,000 NR NR NR NR
19 Jan Epistar Taiwan USD 0.00% 27 Jan 2016 0.00% 30.0% 280 NR NR NR NR
Note: Ratings at time of issue. Source: Bloomberg, Barclays Capital
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Barclays Capital | Convertible Outlook Q2 2011
5 April 2011 15
Asia Pacific convertibles net supply and action dates
Q1 11 realised issuance We calculate that Q1 11 saw:
$2.1bn of issuance; and
$0.3bn of IG issuance (excluding letters of credit provided by IG banks).
Q1 11 realised redemptions We calculate that Q1 11 saw:
$2.9bn of redemptions, mostly in March, resulting in negative net supply of $0.7bn; and
$1.3bn of IG redemptions, resulting in negative IG net supply of $1.0bn.
Remainder of 2011 redemption projection Projecting ahead for the remainder of 2011, we estimate that, all else equal, there could be:
$17.6bn of redemptions, more than half of which is scheduled for April and May alone, requiring $2.0bn of issuance per month for flat annual supply; and
$10.1bn of IG redemptions, requiring $1.2bn of issuance per month for flat IG annual supply. By contrast with EMEA, this looks challenging in terms of achieving flat net supply.
In Figure 28 and Figure 29 we illustrate redemptions for the remainder of 2011, assuming calls and puts occur should their present levels indicate this. We include maturities at the maximum of the bond’s redemption price or parity. Please refer to our Convertible Weekly, 28 February 2011 for both the minimum and maximum scenarios.
March to May sees heavy Asia Pacific convertible redemptions
Figure 28: 2011 issuance versus redemptions ($bn)
Figure 29: 2011 IG issuance versus redemptions ($bn)
-8.0-7.0-6.0-5.0-4.0-3.0-2.0-1.00.01.02.03.0
Jan Mar May Jul Sep Nov
Issuance Conversion Buyback Maturity Call Put
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
Jan Mar May Jul Sep Nov
IG issuance IG redemptions
Note: Q2-Q4 redemptions are scheduled according to current levels; Q2-Q4 Issuance is average required for the full year to exhibit flat net supply. Source: Barclays Capital
Note: Q2-Q4 redemptions are scheduled according to current levels; Issuance is average required for the full year to exhibit flat net supply. Source: Barclays Capital
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Barclays Capital | Convertible Outlook Q2 2011
5 April 2011 16
Figure 30: Potential redemptions and key action dates for Q2 2011
Name Price ParityRed amt
($mn) Action date Action
Aban Loyd Chiles Offshore 0% 2011 118.5 16.8 78 15 April Maturity
China Water Affairs 2.5% 2015 105.5 74.7 15 April Reset date
AED Oil 9% 2012 82.1 65.4 16 April Reset date
CapitaCommercial Trust 2% 2013 109.3 78.7 152 16 April Put notice
Alumina 2% 2013 100.3 41.8 168 16 April Put notice
Sical 0% 2011 121.7 13.2 50 19 April Maturity
SJM 0% 2015 256.8 261.5 49 28 April First call
Reliance Communication 0% 2011 124.5 23.3 374 10 May Maturity
Aurobindo Pharma 0% 2011 (A) 145.5 98.5 155 10 May Final conv.
Aurobindo Pharma 0% 2011 (B) 146.0 113.6 45 10 May Final conv.
Italian-Thai Development 4.5% 2013 103.0 43.6 103 11 May Put notice
India Cements 0% 2011 142.0 32.5 111 12 May Maturity
Nippon Sheet Glass Company 0% 2011 99.5 47.3 274 13 May Maturity
Champion REIT 2% 2011 111.9 107.0 109 13 May Final conv.
China High Speed 0% 2011 107.6 69.2 192 14 May Maturity
Jubilant Organosys 0% 2011 141.0 47.0 202 20 May Maturity
Electrosteel Castings 0% 2011 132.0 75.0 62 26 May Maturity
NEC Electronics (6723) 0% 2011 99.0 7.0 1309 27 May Maturity
Keppel Land 2.5% 2013 105.6 81.0 238 03 June Put notice
OLAM 1% 2013 111.1 80.6 14 03 June Put notice
Champion REIT 1% 2013 130.5 123.6 742 03 June First call
AED Oil 9% 2012 82.1 65.4 10 June Reset date
CapitaMall Trust 1% 2013 106.0 55.8 460 12 June Put notice
Vincom 6% 2014 0.0 103.3 15 June Reset date
Amtek Auto 0% 2011 133.0 33.3 146 16 June Maturity
Jindal Saw 0.75% 2011 121.6 113.4 83 24 June Final conv.
Daewoo 3.25% 2014 139.8 139.5 24 June Reset date
Powerchip 0% 2011 55.0 49.0 23 30 June Maturity
IIF 7.0% 2011 99.0 29.5 208 30 June Maturity
Note: Prices as of 1 April 2011. Redemption amount is greater of parity and redemption price. Source: Barclays Capital
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Barclays Capital | Convertible Outlook Q2 2011
5 April 2011 17
High yield supply: Still booming, but silver linings for convertibles
Although heavy straight bond issuance ostensibly detracts from convertible bond issuance, we see two silver linings here for convertible supply prospects:
1. Excessive straight bond supply may tip the supply/demand balance more towards convertible issuance.
2. The ongoing loan-to-bond shift provides long-term impetus for convertible as well as straight bond issuance, in our view.
Figure 31 highlights the recent boom in European high yield bond issuance. It also illustrates our credit strategists’ forecast for €50bn of supply this year, similar to the 2010 total (see Global Credit Outlook 2011: The great debate - High spread versus low yield, 3 December 2010). With €19bn of HY bond supply in Q1 2011, including a record March, we are well ahead of the run-rate. Figure 32 shows why, in our view – namely, the ongoing secular shift from loan to bond financing for many European HY companies.
In Asia Credit Alpha: On the paper trail, 1 April 2011, our credit strategists reiterate their 2011 FY forecast of $55-60bn total Asian USD-denominated issuance. They look for large Malaysian, Thai and Indian borrowers to tap the market, and for Chinese corporate bond issuance to diversify beyond the real estate sector. However, they also expect the heavy pipeline of HY bond issuance to exert pressure on Asian credit spreads.
Booming straight bond supply has silver linings for convertibles
Our credit strategists forecast €50bn of European HY bond
issuance for 2011
In Asia, too, heavy straight bond issuance looks set to continue,
and to weigh on spreads
Figure 31: European HY bond issuance and our 2011 forecast (€bn)
Figure 32: European HY loan issuance 2001-2010 (12m trailing sum, €bn)
0
10
20
30
40
50
60
00 01 02 03 04 05 06 07 08 09 10 11
Total Remaining 2011 Forecast
`
0
20
40
60
80
100
120
140
160
180
200
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Barclays Capital Credit Strategy Source: Barclays Capital Credit Strategy
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Barclays Capital | Convertible Outlook Q2 2011
5 April 2011 18
CONVERTIBLE THEMES Q2 2011
Pan-asset class strategy views for Q2 2011
Our economists, asset allocation and strategy teams expect the global expansion to continue, but policy normalisation to be a constraint on market performance. We recommend investors shift to a more cautious position on risk, and summarise key views thus:
Allocation Rising macro risks point to a neutral risk stance, more cautious than we have been since
early 2009.
Rising inflation and oil price spikes remain the major threats to global economic growth and, thus, to risk assets.
We continue to prefer developed market equities over emerging market equities and corporate credit.
With monetary tightening on the agenda, emerging market equity and local bond markets are set to struggle. We adopt a neutral outlook for EM risk and look for cost-effective hedges against tail risks. Inflationary pressures continue to build.
Please note that Barclays Capital strategists’ macro forecasts are available via the Global Forecasts link on the Barclays Capital Live client website.
Equities We favour developed equity markets over developing. Our 2011 S&P 500 operating
earnings forecast is $93 and our price target is 1,450. The recent correction has left US equity valuations at very attractive levels, in our view. In the US, we recommend sticking with cyclical positions in the one to two quarters leading to Fed policy normalisation and favour energy, industrials, technology and financials.
European valuations remain attractive and evidence suggests rising institutional interest in equities, which could lead to a re-rating. We reiterate our positive stance on European equities, with a 2011 target of 3,350 for the Euro STOXX 50 and 325 for the STOXX 600.
Structurally, we continue to like EM equities in the long term, given the higher long-term GDP growth rates that we expect. However, the risk remains that over this year, inflation rates will be persistently higher than forecast and require even higher short-term interest rates. This points to the risk of further relative underperformance of EM equities relative to bonds, until headline inflation rates look to have peaked.
Overweights: Basic Resources, Chemicals, Financial Services, Industrial Goods & Services, Insurance, Media, Personal & Household Goods, Real Estate, Technology, Utilities.
Marketweights: Oil & Gas, Travel & Leisure.
Underweights: Autos, Banks, Construction & Materials, Food & Beverage, Health Care, Retail, Telecommunications.
In Japan, the earthquake could have a major impact on the supply of certain industrial products, such as auto and electric components/parts, and high-function materials. Uncertainty about future earnings caused by the disaster, the risk of power shortages
More cautious risk stance now, due to rising macro risks
Global Forecasts link on Barclays Capital Live for macro forecasts
Favour developed market equities over EM, for now
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Barclays Capital | Convertible Outlook Q2 2011
5 April 2011 19
and the high oil price look likely to result in a flight to quality. We expect companies to post very conservative earnings guidance for FY2011. We expect the Nikkei Average to fluctuate, largely centring on 9,800 until this summer.
Convertible implication: Consider reducing delta-exposure in the near term, but retain to certain sectors and look for attractive entry points.
Credit The potential upside in non-financial credit is limited, given current valuations. IG
spreads are close to pre-crisis levels, particularly in the US and EM, and the HY market is increasingly call-constrained in the US and Europe.
European sovereign risk may resurface, although we believe non-European credit will remain resilient in the face of sovereign volatility.
In Europe, swap out of tight-spread higher-quality credits into potential rising stars. We maintain a cautious stance on peripheral credits and recommend selling on strong rallies. Subordinated bonds look attractive and we prefer T1 securities with high back-end coupons.
Convertible implication: Swap out of tight-spread higher-quality credits into potential rising stars, and sell peripheral credits on strong rallies.
Commodities In our view, the downwards move in base metals has been overdone, and we expect
prices for copper and nickel to rally on supportive fundamentals and a diminution of macroeconomic fears.
We expect oil prices to remain elevated due to a sharp compression in global spare capacity combined with the confluence of the geopolitical situations.
Agricultural prices are likely to stay supported in H1, but we expect a modest easing in H2. Food price inflation is likely to remain high on the agenda for policymakers.
Convertible implication: Re-allocate exposure to base metals, maintain exposure to oils and look for opportune exposure to food price inflation.
Currencies The USD is set to remain at a weak level, but is unlikely to keep depreciating relative to
more expensive currencies.
European currencies continue to appear attractive, but the CHF much less so. GBP remains a favoured buy and prospects remain bright for the SEK and NOK.
Commodity prices may continue to rise, but commodity currencies are likely to benefit less. According to our PPP estimates, relative to the USD the CAD is 17% overvalued and the AUD 33%.
We expect local rates and EM FX to be driven primarily by policy responses to intensifying inflationary pressures; a sustained spike in oil prices is the most important risk. Our favourite currencies remain in Asia where, not coincidentally, we think it still pays to be paid.
Convertible implication: Favour GBP, SEK and NOK, take caution on AUD and non-Asia EM.
Long copper, nickel and oil; food inflation likely to persist
USD is unlikely to keep depreciating
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Barclays Capital | Convertible Outlook Q2 2011
5 April 2011 20
Interest rates Although inflation concerns have been evident for some time in the faster-growing
emerging markets and have already resulted in some central banks raising interest rates towards positive real interest rate territory, this is only now coming into focus in developed economies.
The first rate hikes by the ECB and the BoE will likely occur in Q2 11. Markets have discounted a modest tightening cycle, given the numerous geopolitical and economic risks. Risks are skewed towards more being priced in. Fiscal issues are unlikely to have a systemic effect anymore, as markets are increasingly differentiating between countries.
The Fed is likely to complete its $600bn asset purchase programme. While economic data have improved, we expect front-end rates to decline further, as the Fed remains on hold and excess reserves rise. Further, the end of QE2 will likely have a limited effect.
Convertible implication: Reduce portfolio rho.
Recommendations We will publish our detailed thoughts on trade ideas for the quarter in a separate publication soon. For now, we reiterate a few of our previously-published recommendations, consistent with our strategic views outlined above.
EMEA:
Long Aberdeen AM 14, Aldar 11, Autonomy 15, BMPS FRESH, EFG 14, First Quantum 14, Fortis Bank CASHES, NBAD 18, Subsea 13/14.
Reduce Inmarsat 17, Sainsbury 14.
APAC:
Long Bumi 14, Hon Hai 13, Kaisa 15, LG UPlus 15, Nidec 15, Yanlord 14.
Reduce Acer 15/17, Pacific Basin 16.
Summary of convertible-related equity views
Figure 33: Summary of convertible-related European equity views
Ticker Name Stock Rating Sector Sector Rating
Target Price
% Upside
ABG.MC ABENGOA SA 1-Overweight European Renewables & Clean Technology: Energy Efficiency
1-Positive 28.50 22
ADN.L ABERDEEN ASSET MGMT PLC 1-Overweight European Diversified Financials 1-Positive 2.55 21
AEGS.L AEGIS GROUP PLC 1-Overweight European Media 1-Positive 1.65 15
AIRF.PA AIR FRANCE-KLM 1-Overweight European Transportation 1-Positive 17.50 48
AUTN.L AUTONOMY CORP PLC 1-Overweight European Software & IT Services 1-Positive 20.50 29
BMPS.MI BANCA MONTE DEI PASCHI SIENA 1-Overweight European Banks 2-Neutral 1.20 36
CLN.VX CLARIANT AG-REG 1-Overweight European Chemicals 1-Positive 21.70 31
DPWGn.DE DEUTSCHE POST AG-REG 1-Overweight European Transportation 1-Positive 17.00 33
GALP.LS GALP ENERGIA SGPS SA-B SHRS 1-Overweight European Integrated Oil 2-Neutral 18.50 22
IFXGn.DE INFINEON TECHNOLOGIES AG 1-Overweight European Technology Hardware 2-Neutral 8.50 17
IPR.L INTERNATIONAL POWER PLC 1-Overweight European Utilities 1-Positive 4.00 29
Rate hikes largely priced in, but risks are skewed towards more
rate hikes in EUR and GBP
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Barclays Capital | Convertible Outlook Q2 2011
5 April 2011 21
Ticker Name Stock Rating Sector Sector Rating
Target Price
% Upside
ICAG.MC INTL CONSOLIDATED AIRLINES 1-Overweight European Transportation 1-Positive 4.20 61
ITV.L ITV PLC 1-Overweight European Media 1-Positive 1.15 48
PGS.OL PETROLEUM GEO-SERVICES 1-Overweight European Oil Services & Drilling 1-Positive 110.00 24
PMO.L PREMIER OIL PLC 1-Overweight European Oil & Gas: E&P 2-Neutral 21.70 9
QGEN.O QIAGEN 1-Overweight U.S. Diagnostics 1-Positive 23.00 13
REC.OL RENEWABLE ENERGY CORP ASA 1-Overweight European Renewables & Clean Technology: Solar
2-Neutral 28.00 44
SMDR.L SALAMANDER ENERGY PLC 1-Overweight European Oil & Gas: E&P 2-Neutral 3.15 9
SDRL.N SEADRILL LTD 1-Overweight U.S. Oil Services & Drilling 1-Positive 43.00 17
SHP.L SHIRE PLC 1-Overweight European Pharmaceuticals 2-Neutral 18.00 -1
SUBC.OL SUBSEA 7 SA 1-Overweight European Oil Services & Drilling 1-Positive 185.00 32
TECF.PA TECHNIP SA 1-Overweight European Oil Services & Drilling 1-Positive 84.00 12
TT.L TUI TRAVEL PLC 1-Overweight European Leisure 3-Negative 2.60 15
SGEF.PA VINCI SA 1-Overweight European Infrastructure 1-Positive 53.00 20
WPP.L WPP PLC 1-Overweight European Media 1-Positive 9.65 26
III.L 3I GROUP PLC 2-Equal weight European Diversified Financials 1-Positive 3.37 19
ATLN.VX ACTELION LTD-REG 2-Equal weight European Pharmaceuticals 2-Neutral 50.00 -6
ALUA.PA ALCATEL-LUCENT 2-Equal weight European Technology Hardware 2-Neutral 3.90 -6
AAL.L ANGLO AMERICAN PLC 2-Equal weight European Metals & Mining 1-Positive 37.00 14
ATOS.PA ATOS ORIGIN SA 2-Equal weight European Software & IT Services 1-Positive 47.00 11
AXAF.PA AXA SA 2-Equal weight European Insurance 2-Neutral 16.50 9
BBDC4.SA BANCO BRADESCO SA-PREF 2-Equal weight Latin America Banks 1-Positive 38.00 13
CWP.L CABLE & WIRELESS WORLDWIDE 2-Equal weight European Telecom Services 3-Negative 0.68 33
CAPP.PA CAP GEMINI 2-Equal weight European Software & IT Services 1-Positive 46.60 13
DTEGn.DE DEUTSCHE TELEKOM AG-REG 2-Equal weight European Telecom Services 3-Negative 12.50 13
ISA.L INMARSAT PLC 2-Equal weight European Telecom Services 3-Negative 7.60 21
KUD.S KUDELSKI SA-BR 2-Equal weight European Technology Hardware 2-Neutral 18.40 13
LKOHyq.L LUKOIL OAO-SPON ADR 2-Equal weight Russian Oil & Gas 1-Positive 65.00 -11
MOLB.BU MOL HUNGARIAN OIL AND GAS PL 2-Equal weight European Refining & Marketing 3-Negative 24500 0
MTXGn.DE MTU AERO ENGINES HOLDING AG 2-Equal weight European Aerospace & Defense 1-Positive 56.00 13
PTC.LS PORTUGAL TELECOM SGPS SA-REG 2-Equal weight European Telecom Services 3-Negative 9.20 12
PUBP.PA PUBLICIS GROUPE 2-Equal weight European Media 1-Positive 44.00 8
QCEG.DE Q-CELLS SE 2-Equal weight European Renewables & Clean Technology: Solar
2-Neutral 2.90 -6
SBRY.L SAINSBURY (J) PLC 2-Equal weight European Food Retail 1-Positive 4.10 23
SIA.L SOCO INTERNATIONAL PLC 2-Equal weight European Oil & Gas: E&P 2-Neutral 3.85 -1
STM.PA STMICROELECTRONICS NV 2-Equal weight European Technology Hardware 2-Neutral 9.20 5
RUKN.VX SWISS REINSURANCE CO LTD-REG 2-Equal weight European Insurance 2-Neutral 56.00 3
UBI.MI UBI BANCA SCPA 2-Equal weight European Banks 2-Neutral 8.60 41
UCB.BR UCB SA 2-Equal weight European Pharmaceuticals 2-Neutral 30.00 11
VED.L VEDANTA RESOURCES PLC 2-Equal weight European Metals & Mining 1-Positive 26.00 8
ILD.PA ILIAD SA 3-Underweight European Telecom Services 3-Negative 74.00 -13
PPHN.S PETROPLUS HOLDINGS AG 3-Underweight European Refining & Marketing 3-Negative 17.00 15
PEUP.PA PEUGEOT SA 3-Underweight European Autos & Auto Parts 2-Neutral 31.00 8
UNBP.PA UNIBAIL-RODAMCO SE 3-Underweight European Real Estate 2-Neutral 141.70 -8
Note: Ratings and % upsides are from close on 31 March 2011. Source: Barclays Capital
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Barclays Capital | Convertible Outlook Q2 2011
5 April 2011 22
Figure 34: Summary of convertible-related Asia Pacific equity views
Ticker Name Stock Rating Sector Sector Rating
Target Price
% Upside
5201.T ASAHI GLASS CO LTD 1-Overweight Japan Display & Lighting 2-Neutral 1050 0%
8369.T BANK OF KYOTO LTD/THE 1-Overweight Japan Regional Banks 2-Neutral 920 25%
2317.TW HON HAI PRECISION INDUSTRY 1-Overweight Asia ex-Japan IT Hardware 2-Neutral 130 26%
0683.HK KERRY PROPERTIES LTD 1-Overweight Hong Kong Property Developers 1-Positive 48.63 25%
6594.OS NIDEC CORP 1-Overweight Japan Electronic Components 2-Neutral 9340 30%
8086.T NIPRO CORP 1-Overweight Japan Medical Supplies & Devices 1-Positive 2100 28%
9831.T YAMADA DENKI CO LTD 1-Overweight Japan Retail 1-Positive 6800 21%
2409.TW AU OPTRONICS CORP 2-Equal weight Asia ex-Japan LCD Displays 1-Positive 33 28%
6952.T CASIO COMPUTER CO LTD 2-Equal weight Japan Consumer Electronics 2-Neutral 740 12%
6501.T HITACHI LTD 2-Equal weight Japan Machinery 2-Neutral 300 -31%
HKLD.SI HONGKONG LAND HOLDINGS LTD 2-Equal weight Hong Kong Property Investors 1-Positive 6.91 -1%
4902.T KONICA MINOLTA HOLDINGS INC 2-Equal weight Japan Precision Instruments 2-Neutral 860 23%
9984.T SOFTBANK CORP 2-Equal weight Japan Telecom Services 1-Positive 2700 -19%
9684.T SQUARE ENIX HOLDINGS CO LTD 2-Equal weight Japan Interactive Software 2-Neutral 1600 11%
SUZL.NS SUZLON ENERGY LTD 2-Equal weight European Renewables & Clean Technology: Wind
1-Positive 55 23%
2353.TW ACER INC 3-Underweight Asia ex-Japan IT Hardware 2-Neutral 58 -3%
2778.HK CHAMPION REIT 3-Underweight Hong Kong Property Investors 1-Positive 4.32 -4%
0017.HK NEW WORLD DEVELOPMENT 3-Underweight Hong Kong Property Developers 1-Positive 16.84 23%
2343.HK PACIFIC BASIN SHIPPING LTD 3-Underweight Asia ex-Japan Marine Transportation 1-Positive 5.1 4%
6753.T SHARP CORP 3-Underweight Japan Consumer Electronics 2-Neutral 800 -3%
Note: Ratings and % upsides are from close on 31 March 2011. Source: Barclays Capital
Summary of convertible-related credit views
Figure 35: Summary of Barclays Capital EMEA credit views
Overweight Market Weight Underweight
ArcelorMittal Clariant Adecco
Axa Peugeot Air France
IAG Rhodia BCP
Infineon Suedzucker BES
ITV Swiss Re BMPS
TUI AG Michelin
Valeo Portugal Telecom
Vedanta Resources Publicis
WPP STMicroelectronics
Source: Barclays Capital
Figure 36: Summary of Barclays Capital Asia Pacific credit views
Overweight Market Weight Underweight
Berlian Laju Tanker Hynix Semiconductor Hongkong Land
Bumi Resources Kaisa
Country Garden Noble Group
Yanlord Land Orix Corp
POSCO
SK Telecom
Source: Barclays Capital
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Barclays Capital | Convertible Outlook Q2 2011
5 April 2011 23
2011 return projections: Most potential upside remains
In our Convertible Outlook 2011, 15 December 2010, we projected 9% and 10% outright benchmark total returns for EMEA and Asia Pacific convertible markets during 2011. This was based on Barclays Capital’s equity, credit and rates strategists’ forecasts, and on forward modelling of all liquid convertibles in our relevant universes. The main driver of these positive returns was, and still is, our expectations for significant potential equity upside, as shown in Figure 37.
We also modelled upside and downside scenarios for convertibles, based on 1-standard deviation equity moves over 12m, corresponding to volatilities of approximately 30% (the dashed vertical lines in Figure 37). We assumed that credit spreads would move inversely with equity prices, on a “k-factor” of -0.5. This indicated that EMEA convertibles had 1.4x more participation to an up-move in equities than to a down-move, while for Asia Pacific convertibles the upside/downside ratio was 1.6x.
In 2011 to date, our EMEA convertible index total return is +2.8%. Given the modest (sub 1%) returns from equities YTD and c.1% from credit (IG and HY combined, much of which is carry), we find that most of the positive YTD convertible return is attributable to implied-volatility richening, as shown in the ‘Performance’ section earlier in this report. In Asia Pacific as a whole, our convertible index return is +0.7% year to date, with implied volatility only slightly higher overall. Given that our equity strategy forecasts remain unchanged for 2011, at 3,350 for the EuroSTOXX50 index and 325 for the STOXX600, we reiterate our convertible return forecasts for the remainder of 2011 and expect c.10% total returns in both regions. The small uptick for EMEA (cf. 9% before) reflects the year-to-date richening.
Figure 37: Convertible bond total return forecasts for 2011 (vertical) versus potential share price scenarios (horizontal), highlighting their asymmetric potential returns profile, extracted from our Convertible Outlook 2011, 15 December 2010
EMEA convertibles base case projection: +9.0% Asia Pacific convertibles base case projection: +9.8%
-20%
-10%
0%
10%
20%
30%
-60% -30% 0% 30% 60%
CB return scenarios Equities forecast
-1 std dev +1 std dev
-20%
-10%
0%
10%
20%
30%
-60% -30% 0% 30% 60%
CB return scenarios Equities forecast*
-1 std dev +1 std devNote: Base case projections (circled) assume weighted average credit spread compression forecasts from our credit strategy teams of 45bp for EMEA and 40bp for Asia Pacific in 2011, and our equity strategists’ forecast for the STOXX 600 index at end-2011 is 325 or 18% potential equity upside from 10 December 2010. *For Asia Pacific, we apply the same credit-equity forecast relationship, with our spread forecast, to imply a base case projection. Source: Barclays Capital
We had projected 9-10% total returns for EMEA and Asia
Pacific convertibles in 2011, driven mainly by rising equities
We used upside- and downside-scenario analysts to highlight the
asymmetric risk/return profile of convertibles
We continue to expect c.10% convertible returns in both
regions, given performance YTD is mostly attributable
to implied volatility
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Barclays Capital | Convertible Outlook Q2 2011
5 April 2011 24
Volatility relative value: Now rich in both regions
EMEA market relative value Our analysis of volatility-sensitive convertibles in EMEA shows that average convertible-implied volatility climbed since the start of December 2010 (Figure 38). Meanwhile, average 12m at-the-money option-implied volatility declined, as did 100-day realised volatility. In our view, EMEA convertibles have therefore richened versus option-implied and 100-day volatilities. As at the end of March 2011, on average, versus the start of December 2010:
Convertible-implied volatility is 31.8%, up 3.2pts;
credit-calibrated convertible-implied volatility is 36.9%, up 2.5pts;
12m at-the-money option-implied volatility is 30.8%, down 4.0pts;
100-day realised volatility is 28.4%, down 2.1pts;
999-day realised volatility is 49.5%, up 0.5pts; and
convertible bond credit spreads are 332bp, wider by 12bp.
Thus, credit-calibrated convertible-implied volatilities are now 6.1pts higher than option-implied volatilities, on average. At the start of December 2010, they were 0.4pts lower.
Figure 38: Summary of volatility metrics (%) for EMEA volatility sensitive convertibles
Uncalibrated CB IV Calibrated CB IV 12m ATM option IV 100-day volatility 999-day volatility
30 Mar 2010 (56 bonds)
Mean 30.8 37.6 34.8 31.4 50.4
Median 30.1 37.4 35.2 32.2 48.3
30 June 2010 (55 bonds) Mean 25.2 32.9 39.3 39.1 50.9
Median 25.8 33.4 40.5 38.2 48.6
28 Sept 2010 (58 bonds) Mean 28.8 36.0 37.7 37.2 51.1
Median 28.5 37.0 37.4 38.6 49.4
30 Nov 2010 (59 bonds) Mean 28.6 34.4 34.8 30.5 49.0
Median 27.2 34.0 34.5 30.1 47.7
31 Mar 2011 (68 bonds) Mean 31.8 36.9 30.8 28.4 49.5
Median 31.6 37.3 32.1 28.2 47.2
Note: “IV” denotes implied volatility. 100- and 999-day volatilities are for the underlying equity in the currency of the bond. Data as of close on 31 March 2011. Source: Bloomberg, Barclays Capital
EMEA convertibles have richened in implied-volatility
terms versus option-implied and 100-day realised volatilities
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Barclays Capital | Convertible Outlook Q2 2011
5 April 2011 25
Asia Pacific market relative value For Asia Pacific, our analysis shows that average convertible volatilities – uncalibrated and calibrated – have edged higher in 2011 to date (Figure 39). Meanwhile 12m at-the-money option-implied volatilities have ticked slightly lower and 100-day realised volatility moved higher. Hence, finding our view, the asset class remains rich in volatility relative value terms. As at the end of March 2011, on average, versus the start of December 2010:
convertible-implied volatility is 30.6%, up 1.6pts;
credit-calibrated convertible-implied volatility is 34.1%, up 0.5pts;
12m at-the-money option-implied volatility is 30.7%, down 0.6pts;
100-day realised volatility is 32.6%, up 2.3pts;
999-day realised volatility is 48.3%, down 0.4pts; and
convertible bond credit spreads are 332bp, wider by 12bp.
Thus, credit-calibrated convertible-implied volatilities are now 3.4pts higher than option-implied volatilities, on average. At the start of December 2010, they were 2.3pts higher.
Figure 39: Summary of volatility metrics (%) for Asia Pacific volatility sensitive convertibles
Uncalibrated CB IV Calibrated CB IV 12m ATM option IV 100-day volatility 999-day volatility
17 May 2010 (31 bonds)
Mean 30.6 35.1 32.3 32.8 48.8
Median 30.0 35.9 32.2 32.2 47.3
30 June 2010 (32 bonds)
Mean 26.4 31.3 35.4 34.4 51.3 Median 27.1 33.0 34.1 33.5 51.5
28 Sept 2010 (56 bonds) Mean 27.7 32.0 31.6 33.1 51.8 Median 27.8 32.5 31.2 34.8 46.8
30 Nov 2010 (54 bonds) Mean 29.2 33.6 31.3 30.3 48.7 Median 29.2 33.4 31.4 30.1 46.2
31 Mar 2011 (55 bonds) Mean 30.6 34.1 30.7 32.6 48.3 Median 30.4 32.5 31.0 30.8 46.8
Note: “IV” denotes implied volatility. 100- and 999-day volatilities are for the underlying equity in the currency of the bond. Data as of close on 31 March 2011. Source: Bloomberg, Barclays Capital
Convertible-specific volatility relative value Figure 40 and Figure 41 show convertible-implied, option-implied and realised volatilities for EMEA and Asia Pacific convertibles, respectively, as of 31 March 2011. Few bonds now offer significant discounts to option-implied or 100-day volatility. Below, we list the least rich in relative calibrated implied-volatility terms as well as the convertibles with relatively stretched valuations, in our view.
Undervalued EMEA convertibles in implied-volatility terms: are Peugeot ’16, conwert Immobilien ’14 and ’16, Subsea 7 ’13 and ’14, Steinhoff ’16 and ’18, Vedanta ’16 and ’17, Frontline ’15.
Several of these names have multiple balanced convertibles outstanding, and may be less rich partly for that reason.
Asia Pacific convertibles remain rich in implied volatility terms relative to option-implied and
100-day realised volatilities
Few bonds now offer significant discounts to option-implied or
100-day volatility
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Barclays Capital | Convertible Outlook Q2 2011
5 April 2011 26
Overvalued EMEA convertibles in implied-volatility terms: Technip ’16, Capgemini ’14, Sainsbury ’14, Lukoil ’15, Aegis ’15, Air France ’15, Atos ’16, Premier Oil ’14, Salzgitter ’16, Faurecia ’15, Inmarsat ’17, Seadrill ’17.
Many of these names are either rich owing to their investment grade credit profiles, potentially attractive change-of-control protection, or name/sector scarcity within the convertible universe.
Figure 40: Uncalibrated and credit-calibrated convertible IV, 12m ATM option IV (where available), 100-day and 999-day realised volatility, for volatility-sensitive EMEA convertibles – in order of ascending credit spread input (left to right)
0%10%20%30%40%50%60%70%80%90%
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Uncalibrated CB IV Calibrated CB IV 12m ATM option IV 100d realised vol 999d realised vol
Note: Data as of close on 31 March 2011. Option IVs are 12m at-the-money. 100-day and 999-day volatility are in the bond currency. Source: Barclays Capital
Undervalued Asia Pacific convertibles in implied-volatility terms: AREIT ’17, Asahi Glass ’12 and ’14, CapitaLand 2.875% ’16, CapitaMall Trust ’14, Hynix ’15, IHI ’16, Keppel Land ’15, SK Telecom ’14, Tata Steel ’14.
Overvalued Asia Pacific convertibles in implied-volatility terms: Acer ’15 and ’17, Beijing Enterprise ’14, Epistar ’16, GOME ‘14, Hengdeli ’15, Hon Hai ’13, Pacific Basin ’16, Soho China ’14, Western Areas ’15.
Figure 41: Uncalibrated and credit-calibrated convertible IV, 12m ATM option IV (where available), 100-day and 999-day realised volatility, for volatility-sensitive Asia Pacific convertibles – in order of ascending credit spread input (left to right)
0%10%20%30%40%50%60%70%80%
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Uncalibrated CB IV Calibrated CB IV 12m ATM option IV 100d realised vol 999d realised vol
Note: Data as of close on 31 March 2011. Option IVs are 12m at-the-money. 100-day and 999-day realised volatility are in the bond currency. Source: Barclays Capital
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Barclays Capital | Convertible Outlook Q2 2011
5 April 2011 27
Screening for rho: Less is more Our rate strategists believe that EUR and GBP interest rate risks are more skewed to the upside. For the USD, we see this as less of a risk currently, as our economists expect the Fed to remain on hold this year. An implication for convertible investors is interest rate/swap rate risk. In Figure 42 (EMEA) and Figure 43 (APAC) we list convertibles with the lowest and highest rho sensitivities.
In EMEA, unsurprisingly, we favour floating-rate convertibles with positive rho – ie, higher interest rates should benefit valuations. This is because, at a fixed credit spread, the spread as a percentage of the all-in rate declines as the risk-free rate rises. Therefore, we expect that the Ageas FRESH, Fortis CASHES and BMPS FRESH perpetual convertibles could outperform if EUR rates were to rise faster/by more than is currently priced into the yield curve. One caveat to the above would be if spreads tighten, but then holders should log a credit gain. Conversely, long-dated, fixed-rate, low-parity convertibles carry the most rho risk in our view: for example, Axa 2017, Michelin 2017 and Industrivarden 2017.
In Asia Pacific, there are no floating rate perps, so we find lowest rho risk among short-dated or high-parity bonds, and vice-versa. Our strategists anticipate monetary policy tightening to fight inflation in SGD, KRW, HKD and CNY. For holders of convertibles in these currencies, we recommend not hedging the currency risk versus the USD or EUR, to offset the risk of incrementally higher rates. If, on the other hand, rates rise faster/by more than we or the market expect, then the large, longer-dated Capitaland convertibles look among the most exposed.
Figure 42: Rho screen for EMEA convertibles
Least rho
Name Ccy Amt (mn) Price Parity YTM/P Next Call Trigger (%) Next Put Rho
Ageas FRESH EUR 1,250 52.0 6.8 9.9% 4.4
Fortis CASHES EUR 3,000 59.5 9.0 9.8% 19 Dec 2014 150 3.8
BMPS FRESH 2099 EUR 1,000 58.0 27.7 13.9% 3.4
NBAD FRN 2016 AED 1,112 83.0 42.0 8.2% 0.2
NBAD FRN 2018 AED 1,614 93.8 46.6 7.2% 28 Feb 2013 0.1
International Power 3.75% 2023 USD 229 275.9 275.6 -5.8% 22 Aug 2013 0.0
Tabreed sukuk 2011 AED 1,700 20.0 7.9 0.0% 0.0
Immofinanz 7% 2011 EUR 194 150.5 152.0 -38.1% -0.1
Subsea 7 2.8% 2011 USD 229 103.7 95.8 -14.7% -0.1
Magnolia - MOL 4% perp EUR 610 101.0 85.4 7.8% 20 Mar 2016 -0.2
Most rho
Name Ccy Amt (mn) Price Parity YTM/P Next Call Trigger (%) Next Put Rho
Axa 3.75% 2017 EUR 1,098 232.0 64.1 5.3% 01 Jan 2012 125 -7.1
Michelin 0% 2017 EUR 700 114.0 61.5 3.6% 21 Mar 2012 135 -5.4
Industrivarden 1.875% 2017 EUR 550 100.0 65.6 1.9% 22 Jun 2014 130 -3.9
Baloise 1.5% 2016 CHF 243 106.3 76.9 0.4% 08 Dec 2014 140 -3.7
Steinhoff 4.5% 2018 EUR 468 97.8 73.4 6.2% 14 Apr 2016 140 -3.6
Ingenico 2.75% 2017 EUR 250 40.0 26.6 1.5% 15 Jan 2015 130 -3.4
Aquarius Platinum 4% 2015 USD 300 115.9 87.2 0.6% 08 Jan 2013 130 -3.2
International Power 4.75% 2015 EUR 700 111.2 65.3 2.0% 20 Jun 2013 130 -3.2
UCB 4.5% 2015 EUR 500 110.2 68.6 2.2% 12 Nov 2013 130 -3.2
TUI Travel 4.9% 2017 GBP 400 98.0 58.7 5.5% 10 May 2014 130 27 Oct 2015 -3.2
Note: Rho is the sensitivity to a 100bp parallel increase in the bond-currency interest rate curve, rescaled into a percentage for unit bonds. Source: Barclays Capital.
As interest rates rise, ex-USD, we favour bonds with lower pure
interest rate sensitivity (rho)
EMEA: Ageas, Fortis and BMPS floaters could outperform from
higher rates, while Axa, Michelin and Industrivarden could suffer
APAC: Capitaland bonds among the most exposed, although we
expect currencies to offset the monetary policy response
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Barclays Capital | Convertible Outlook Q2 2011
5 April 2011 28
Figure 43: Rho screen for APAC convertibles
Least rho
Name Ccy Amt (mn) Price Parity YTM/P Next Call Trigger (%) Next Put Rho
Hongkong Land 2.75% 2012 USD 400 177.1 177.1 -26.5% 0.0
Khazanah - Tel Mal 1.25% 2011 USD 750 146.3 154.3 -29.2% 0.0
Alumina 2% 2013 USD 168 99.8 36.6 3.7% 16 May 2011 130 16 May 2011 -0.1
KCC - Hyundai Heavy 3.5% 2014 USD 55 241.0 240.5 -22.8% 06 May 2012 130 06 May 2012 -0.2
CapitaMall Trust 1% 2013 SGD 550 105.3 53.4 2.8% 02 Jul 2011 130 02 Jul 2011 -0.3
Khazanah - PLUS 2% 2012 USD 850 130.2 129.6 -8.2% -0.5
Nippon Yusen 0% 2026 JPY 55,000 99.0 41.6 2.1% 20 Sep 2016 20 Sep 2011 -0.5
Tata Motors 4% 2014 USD 120 188.2 191.2 -11.8% 15 Oct 2012 130 -0.5
Posco - SK Tel 0% 2013 JPY 52,795 100.5 52.3 2.6% 19 Aug 2011 120 19 Aug 2011 -0.6
Oceana 5.75% 2012 AUD 53 94.0 60.8 15.1% 22 Jun 2011 130 -0.7
Most rho
Name Ccy Amt (mn) Price Parity YTM/P Next Call Trigger (%) Next Put Rho
Capitaland 2.95% 2022 SGD 1,000 93.5 28.6 4.2% 20 Jun 2014 130 20 Jun 2017 -5.1
CapitalLand 3.125% 2018 SGD 1,050 103.3 46.2 3.9% 05 Mar 2013 130 05 Mar 2015 -3.8
IHI 0% 2016 JPY 20,000 101.0 64.8 -0.2% 28 Mar 2014 130 -3.7
Capitaland 2.875% 2016 SGD 1,200 100.1 69.8 2.9% 03 Sep 2014 130 -3.6
Acer 0% 2017 (B) USD 200 106.6 67.5 1.7% 10 Aug 2013 130 10 Aug 2015 -3.6
Keppel Land 1.875% 2015 SGD 500 96.9 64.0 2.6% 29 Nov 2013 130 -3.4
AU Optronics 0% 2015 USD 800 98.9 63.3 3.4% 13 Oct 2013 130 -3.3
New World Dev 0% 2014 HKD 6,000 111.1 50.9 4.6% 04 Jun 2012 130 -3.3
Unicharm 0% 2015 JPY 46,000 105.5 78.4 -1.2% 24 Sep 2013 120 -3.1
Square Enix 0% 2015 JPY 35,000 99.0 56.5 0.3% 04 Feb 2013 130 -3.1
Note: Rho here is the sensitivity to a 100bp parallel increase in the bond-currency interest rate curve. Source: Barclays Capital.
Indian FCCBs: A maturing market
India (along with Japan) accounts for a large portion of Asia Pacific convertible maturities in the heavy March to May period. We estimate at least $1.9bn of Indian FCCB are due to mature in these three months alone, out of our expected full-year 2011 Asia Pacific redemptions total of $20bn (see earlier ‘Redemptions’ section).
In our Convertible Outlook 2011, 15 December 2010, we screened for Indian FCCBs with upcoming maturities and provided some key repayment metrics. In Figure 44, we map the maturity schedule of Indian FCCBs in 2011, highlighting those greater than USD100mn or equivalent. Indian FCCB redemptions through the end of March were $1.0bn, and we project another $1.9bn in maturing bonds this year.
In our view, the weight of these redemptions may be partly offset by new supply. Further, our data show these redemptions would still leave more than $5bn of Indian FCCBs outstanding beyond 2011, even in the unlikely event of no further issuance this year.
$1.9bn of Indian FCCBs are due to mature in March to May alone
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5 April 2011 29
Figure 44: Indian FCCB maturities in 2011 ($mn)
Fin TechGitanjaliAmtek Auto
JubilantAurobindo
India Cement
Rel Comm
Tata Motors
Ranbaxy
Bajaj H
0
100
200
300
400
500
600
01 Jan
31 Jan
02 Mar
01 Apr
01 May
31 May
30 Jun
30 Jul
29 Aug
28 Sep
28 Oct
27 Nov
27 Dec
Indian FCCB maturities in 2011 ($mn)
Fin TechGitanjaliAmtek Auto
JubilantAurobindo
India Cement
Rel Comm
Tata Motors
Ranbaxy
Bajaj H
0
100
200
300
400
500
600
01 Jan
31 Jan
02 Mar
01 Apr
01 May
31 May
30 Jun
30 Jul
29 Aug
28 Sep
28 Oct
27 Nov
27 Dec
Indian FCCB maturities in 2011 ($mn)
Note: Calculated as the maximum of current parity and the redemption amount. Source: Barclays Capital
Callable bonds: More potential upside than meets the eye
In our Convertible Weekly, 28 March 2011, we analysed empirically the outright upside on convertibles above and beyond their call trigger levels. Since the start of 2006, we identified 12 EMEA or APAC convertibles of at least €250mn or $250mn where parity rose through the call trigger level and the issuer subsequently called the bond (Figure 45). Of these, the median parity level at the time was +7.5% above the trigger level. Of the 12 bonds in the sample, 10 had parity above the call trigger. In our view, these results reinforce our argument that callable convertibles provide potential outright upside above and beyond their call triggers.
Figure 45: Empirical analysis of outright upside above and beyond call trigger levels
Bond Call announce
date Call trigger
level Parity at call
announce Differential
adidas 2.5% 2018 07-Oct-09 130.0 137.8 6.0%
Anglo American 3.375% 2007 21-Jun-06 130.0 170.8 31.3%
Arcadia Global Corp. 0% 2009 13-Jul-06 120.0 143.9 20.0%
ASML 5.5% 2010 08-Oct-07 150.0 147.9 -1.4%
Cable & Wireless 4% 2010 22-Jun-07 130.0 133.4 2.7%
Capitalia - Generali 1.625% 2009 07-Nov-07 130.0 133.4 2.6%
Deutsche Post-Postbank 2.65% 2007 05-Jul-06 130.0 150.0 15.4%
Linde 1.25% 2009 16-Apr-08 120.0 164.0 36.6%
Pemex - Repsol 4.5% 2011 24-Sep-08 130.0 133.8 2.9%
PPR 2.5% 2008 26-Oct-06 107.8 118.9 10.3%
Technip 1% 2007 23-Feb-06 224.0 208.6 -6.9%
Tenaga 2.625% 2007 28-Sep-06 115.0 125.3 9.0%
Median 7.5%
Mean 10.7%
Note: We include convertibles whose parity rose through the call trigger and the issuer subsequently called the bond, since 2006. Parity and accreted call triggers are at the call announce date. Source: Barclays Capital
Callable convertibles have provided investors with upside
above and beyond their call trigger levels, according to our
empirical analysis
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5 April 2011 30
We also recently used a theoretical Monte Carlo simulation-based model to estimate the potential upside on Seadrill’s 2012 convertible – see Seadrill 3.625% 2012 convertible: More potential upside to the call than meets the eye, 17 March 2011. Our analysis showed, at the start of the call trigger period, that expected parity would be 139 when the bond could be called, averaged over thousands of simulated share price paths. This is 7% above the bond’s trigger level – close to the median in our empirical study of bonds that were called in the past, above.
Further potential call upside opportunities? A further source of potential upside for holders of callable convertibles is if the issuer does not call at its earliest opportunity. This is difficult to predict a priori, but a recent example was International Power 3.75% 2023 – see International Power 3.75% 2023 convertible: Three sources of potential upside, 7 February 2011.
Convertibles in our active universe that are currently callable but have not yet been called by the issuer include:
EMEA: International Power 3.75% 2023.
Asia Pacific: Hongkong Land 2.75% 2012, Noble Group 0% 2014, Softbank 1.75% 2014.
Other convertibles that could soon become callable, or if the share price/parity were to rise modestly from current levels include:
EMEA: International Power 3.25% 2013, Qiagen 1.5% 2024, Seadrill 3.625% 2012, Subsea 7 2.25% 2013.
Asia Pacific: Khazanah - Plus 2% 2012, Champion REIT 1% 2013, Wilmar 0% 2012.
Theoretical model for potential call upside in Seadrill ’12
corroborated empirical analysis
Also some potential upside from convertibles that are not called
at the earliest opportunity
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Barclays Capital | Convertible Outlook Q2 2011
5 April 2011 31
High-yielding convertibles: Yieldscape™ We provide two forms of yield screens, the first is our YieldScape™, that lists the highest yielding bonds in our liquid universe. The second is a similar list, but ordered by the distance from the lowest yield over the past six months. Data is derived from the interactive YieldScape™ tool on CB Insight™, our online convertibles portal.
Figure 46: EMEA YieldScapeTM – Yield to maturity/put (left) and running yield (right) of EMEA convertible bonds and their yield ranges over the past six months
0%
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7%
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9%Running Yield Current YTM/P Low YTM/P High YTM/P
Note: Data as at 30 March 2011. YTM/P is the greater of the semi-annual yield to maturity and yield to put (if any). Solon 2012 yield, at 73%, not displayed.
Figure 47: EMEA convertible yield ranges over the past six months
Issuer Sector Country Currency Running
Yield YTM/P High Yield
Low Yield
YTM/P - Low
Dana Gas sukuk 2012 Mining, Oil and Gas UAE USD 8.3 15.4 15.4 9.5 5.8
La Caixa - Criteria 3.5% 2011 Banking Spain EUR 3.5 0.3 5.6 -3.8 4.1
EFG Eurobank 1.7% 2014 Banking Greece EUR 2.6 14.3 15.2 10.6 3.7
Parpublica - EDP 3.25% 2014 Public Sector Portugal EUR 3.6 9.2 9.9 5.5 3.6
BCP - Portugal Telecom 3% 2015 Banking Portugal EUR 3.3 5.5 7.4 1.9 3.6
TUI - TUI Travel 4.5% 2013 Transport And Leisure United Kingdom EUR 4.3 1.9 6.2 -1.6 3.5
Tamweel sukuk 2013 Banking UAE USD 4.9 12.4 12.6 9.6 2.8
BES - EDP 3% 2015 Banking Portugal EUR 3.3 7.8 11.9 5.2 2.6
Aquarius Platinum 4% 2015 Mining, Oil and Gas United Kingdom USD 3.5 1.1 3.1 -1.1 2.2
MNV - Gedeon Richter 4.4% 2014 Public Sector Hungary EUR 4.5 5.4 6.0 3.3 2.1
Celesio 3.75% 2014 Pharmaceuticals Germany EUR 3.5 1.4 1.4 -0.6 2.1
Frontline 4.5% 2015 Transport And Leisure Norway USD 4.7 6.1 6.4 4.1 2.0
Artemis - PPR 2% 2011 Miscellaneous France EUR 1.7 3.2 4.6 1.2 2.0
Source: Barclays Capital
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Barclays Capital | Convertible Outlook Q2 2011
5 April 2011 32
Figure 48: Asia Pacific YieldScapeTM – Yield to maturity/put (left) and running yield (right) of Asia Pacific convertible bonds and their yield ranges over the past six months
0%
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0%
1%
2%
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4%
5%
6%
7%
8%
9%Running Yield Current YTM/P Low YTM/P High YTM/P
Note: Data as at 30 March 2011. YTM/P is the greater of the semi-annual yield to maturity and yield to put (if any). Source: Barclays Capital
Figure 49: Asia Pacific convertible yield ranges over the past six months
Issuer Sector Country Currency Running
Yield YTM/P High Yield
Low Yield
YTM/P - Low
Toshiba 0% 2011 Industrial Japan JPY 0.0 2.1 3.0 -9.3 11.4
China Green 3% 2013 Food And Retail Hong Kong CNY 3.5 15.5 17.1 5.9 9.7
Oceana 5.75% 2012 Mining, Oil and Gas Australia AUD 6.0 14.2 103.3 5.9 8.3
Educomp 0% 2012 Technology India USD 0.0 10.3 12.5 3.8 6.5
Paladin Energy 5.0% 2013 Mining, Oil and Gas Australia USD 5.0 5.4 7.4 -0.3 5.7
JSW 0% 2012 Industrial India USD 0.0 4.6 6.0 -0.6 5.3
Fufeng Group 4.5% 2015 Food And Retail Hong Kong CNY 4.3 3.1 3.9 -1.8 4.9
Paladin Energy 3.625% 2015 Mining, Oil and Gas Australia USD 3.7 3.9 5.4 -0.7 4.6
Welspun Gujarat 4.5% 2014 Industrial India USD 4.6 5.7 7.3 1.1 4.6
Reliance Comms 0% 2012 Telecoms India USD 0.0 9.3 13.6 4.8 4.5
STX Pan Ocean 4.5% 2014 Transport And Leisure Republic Korea USD 4.4 3.6 3.9 -0.4 4.0
Jaiprakash Power 5% 2015 Utilities India USD 5.0 8.0 8.7 4.3 3.7
Jaiprakash 0% 2012 Industrial India USD 0.0 8.7 9.1 5.2 3.5
Source: Barclays Capital
INTELLECTUAL PROPERTY NOTICE: The Convertible YieldScape contains intellectual property rights of Barclays Bank PLC, including database rights and copyright. Barclays Bank PLC reserves all rights in the Convertible YieldScape. Redistribution of the Convertible YieldScape is prohibited. ‘Convertible YieldScape’ is a trade mark of Barclays Bank PLC.
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Barclays Capital | Convertible Outlook Q2 2011
5 April 2011 33
CoCoCos: Are three “Cos” better than two? Convertible contingent capital securities, or convertible contingent convertibles (“CoCoCos”), are a natural and potentially more alluring evolution of contingent capital securities or contingent convertibles (“CoCos”), in our view.
CoCoCos are similar to CoCos, except that the holder also has the option to convert into shares, like a conventional convertible. No CoCoCos have yet been issued to our knowledge, although one was announced. We expect CoCoCos will provide impetus to the growth of the CoCo asset class, given the investor/issuer rationale, as well as the still unanswered question “is there a natural home for CoCos?”. More details on CoCos can be found via the links in the ‘Barclays Capital Research key publications on CoCos in Q1 2011’ section below.
We will revisit CoCos and CoCoCos in more depth in subsequent reports, the following is a brief summary of our thoughts so far.
Investor rationale: Attractive yield with equity upside We see four compelling reasons why convertible investors may be attracted to CoCoCos:
1. higher yield than equivalent, conventional convertibles;
2. multi-year bank equity upside options;
3. valuation concessions, particularly while the product is new; and
4. scarce supply of conventional convertibles to satiate robust demand.
Issuer rationale: Basel 3 compliance with lower coupon We also see four compelling reasons for banks to issue CoCoCos:
1. lower coupon than on straight CoCos, by monetising the bank’s equity volatility;
2. provisional sale of equity at a premium, with structuring flexibility, eg, conditional calls;
3. convertible investors may be more natural buyers of CoCoCos, compared to CoCos; and
4. diversify sources of Basel 3 compliant financing.
The latter is significant given our European banks equity analysts’ estimate that €500bn to €700bn of contingent capital may be required by 2018 to comply with Basel 3; see European Banks: Are Cocos A Go Go?: The role of contingent convertible capital, 7 February 2011.
Modelling and valuation thoughts: Art meets science A key challenge in valuing CoCoCos and CoCos is valuing the ‘downside’ conversion upon a capital ratio trigger event. Specifically, in establishing a realistic yet tractable relationship between the issuer’s capital ratio and its market equity price. Possible approaches include:
Deterministic relationship: Straightforward to implement in standard convertible model frameworks, but questionable realism.
Probabilistic relationship: Allows for stochasticity in the relationship, but more complex to implement and more parameters to estimate.
Relative value: More pragmatic and market-based, but does not quantify the equity-linked downside option value or risk.
CoCoCos are a natural and alluring evolution of CoCos, with
a compelling rationale for investors and issuers in our view
Banks may need €500-700bn of contingent capital by 2018
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5 April 2011 34
The convertible market: A natural home, up to a point We see the convertible market as a natural home for CoCoCos, but with limitations:
Market capacity: The EMEA convertible universe market value is €87bn. Average annual new issuance over the past 5yrs was €19bn. Even if CoCoCo issuance matches this over 5yrs, that still raises only 10-20% of the €500bn to €700bn estimated requirement.
Sector credit concentration: In the above scenario, half of the new issuance would be long-dated subordinated bank credit, which could concern some portfolio managers.
Valuation challenges: Primarily, in modelling the downside conversion feature.
Conventional issuance: One reason why CoCoCos could be well received by investors is the currently modest conventional convertible issuance. This could change, though.
Barclays Capital Research key publications on CoCos in Q1 2011 European Banks: Are Cocos A Go Go?: The role of contingent convertible capital, 7 February 2011 (Equity Research).
Credit Suisse CoCos: Positive read-across, 17 February 2011 (Credit Research)
CoCos - What have we learned, 17 February 2011 (Equity Research)
U.S. Banks: Limited CoCo Issuance Expected, 11 March 2011 (Credit Research)
Benchmark Convertibles Index - eligibility of contingent convertible capital securities, 4 March 2011 (Index Products)
CB InsightTM: Now with choice of models and new issue pricer
CB Insight™ is our online convertibles portal providing interactive analytical tools, market data and research.
Key enhancements on CB Insight™ New Issue Modeller: Create a custom new issue via the “Model New Issue” button in the
top-right of any page in CB Insight™ or adapt from an existing bond from the relevant Bond Pricer window – see Figure 50.
Choice of Models in Bond Pricer: Jump to default (non-calibrated or credit-calibrated) and blended discount models are now available in the Bond Pricer and the new issue modeller (Figure 50). See below for a comparison of these models.
Benchmark Indices in Market Monitor page: Graphs of our EMEA and Asia Pacific convertibles indices levels and implied volatilities in the bottom-right of the Market Monitor page. Also, link to the “Open the Index Map” on Barclays Capital Live, for full index and sub-index performance, analytics and constituents data.
Time Series Charts in Bond Pricer: View historical bond-level price, parity, premium, volatility and credit spread in Bond Pricer (right-hand side) with customisable start dates.
Enhanced Publication Search in Research page: Efficient keyword searching of convertible and related fundamental research, via the Search Publications tab.
Downloadable PDF: One-click access to our data powering the site, via the Adobe Reader icon in the top-right of any window.
New issue modeller and a choice of valuation models, including
jump to default, are among the major recent enhancements
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Barclays Capital | Convertible Outlook Q2 2011
5 April 2011 35
Figure 50: CB Insight™ windows highlighting the New Issue Modeller and the choice of valuation models in the Bond Pricer
Note: Blue ovals outline new functionality – the New Issue Modeller and the choice of valuation models in the Bond Pricer. Source: Barclays Capital
Comparison summary between different valuation models in CB Insight™
Jump to default model Blended discount model
Equity price can either rise or fall (diffusion), or default (jump)
Equity price can only rise or fall (diffusion)
Equity forward, absent default, grows at the risky rate (ie, risk-free rate plus the credit spread)
Equity forward grows at the risk-free rate
Credit risk is handled via the probability of jumping to default, implied by the credit spread, equivalent to discounting all cash-flows at the risky rate
Credit risk is handled by discounting bond cash flows at the risky rate; equity cash flows are discounted at the risk-free rate
Hence, equivalent to “full discount”, or “grow risky, discount risky” models, but the latter are not calibrated
Hence also known as “grow risk-free, discount composite”
Uncalibrated, input and implied volatilities are contributions from diffusion only, with additional volatility introduced via the credit-spread
Input and implied volatilities are contributions from diffusion only, and no additional volatility is introduced
Jump to default model calibrated
Calibration allows comparison of convertible-implied volatility with Black-Scholes/option-implied volatility or with realised volatility
Calibrated, input and implied volatilities are total volatility contributions and the credit-spread dictates what portion of this is used for the jump-to-default and what portion for diffusion
The jump to default model can be calibrated to compare
convertible-implied volatility with option-implied/
realised volatilities
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Barclays Capital | Convertible Outlook Q2 2011
5 April 2011 36
Existing features on CB Insight™ Market Monitor page:
− Performance: Identify convertible bond performance over specified time horizons.
− Market Profile: Breakdown by credit rating, sector, country and bond profile.
− New Issues: Analyse individual convertibles or screen the primary market in aggregate.
− Upcoming Events: Screen conveniently for puts, calls and maturity schedules.
Bond Pricer: Perform valuations and scenario analysis using our online calculation engine.
Tracker Tool: Map the market with interactive price versus parity scatters.
YieldScape™: Customizable chart of highest-yielding bonds with historical yield ranges.
Accessing CB Insight™ Link – https://live.barcap.com/keyword/CBINSIGHT
Keyword to enter in top right hand “Search” box on Barclays Capital Live: CBINSIGHT
Navigation: Barclays Capital Live > Analytics & Research > Equities > Convertible Bonds
Barclays Capital Convertibles Indices: Asia Pacific launched
The Barclays Capital EMEA Convertibles Index and Asia Pacific Convertibles Index form part of our benchmark index family. They are designed to be broad-based, but we also publish numerous sub-indices that offer breakdowns along multiple dimensions. For full details, please see Barclays Capital EMEA Convertibles Index, 9 June 2010 and Asia Pacific Convertibles Index, 24 January 2011. The latter completes our set of regional benchmark convertible composite indices: US, EMEA and Asia Pacific.
Our new Asia Pacific Convertibles index provides composite benchmark returns, analytics, attributes and time series for the region as a whole, and also for Asia ex-Japan and Japan, separately, as well as their various respective sub-indices and constituents.
Figure 51: Accessing the new Barclays Capital EMEA and Asia Pacific Convertibles Indices on Barclays Capital Live
Barclays Capital Live
EMEA Convertibles Index Page(keyword:
EMEAconverts)
Research Analytics &
AnalyticsResearch
Benchmark Indices
(keyword: index)
Index Data
(index returns, analytics, & greeks
and analytics)
Constituents
(Security level pricing and, analytics),
returns)
Barclays Capital Live
EMEA Convertibles Index Page(keyword:
EMEAconverts)
Analytics & Research
Benchmark Indices
(keyword: index)
Index Data
(index returns, and analytics)
Constituents
(Security level pricing and, analytics)
Barclays Capital Live
EMEA Convertibles Index Page(keyword:
EMEAconverts)
Research Analytics &
AnalyticsResearch
Benchmark Indices
(keyword: index)
Index Data
(index returns, analytics, & greeks
and analytics)
Constituents
(Security level pricing and, analytics),
returns)
Barclays Capital Live
EMEA Convertibles Index Page(keyword:
EMEAconverts)
Analytics & Research
Benchmark Indices
(keyword: Index)
Index Data
(index returns, and analytics)
Constituents
(Security level pricing and, analytics)
Barclays Capital Live
EMEA Convertibles Index Page(keyword:
EMEAconverts)
Research Analytics &
AnalyticsResearch
Benchmark Indices
(keyword: index)
Index Data
(index returns, analytics, & greeks
and analytics)
Constituents
(Security level pricing and, analytics),
returns)
Barclays Capital Live
EMEA Convertibles Index Page(keyword:
EMEAconverts)
Analytics & Research
Benchmark Indices
(keyword: index)
Index Data
(index returns, and analytics)
Constituents
(Security level pricing and, analytics)
Barclays Capital Live
EMEA Convertibles Index Page(keyword:
EMEAconverts)
Research Analytics &
AnalyticsResearch
Benchmark Indices
(keyword: index)
Index Data
(index returns, analytics, & greeks
and analytics)
Constituents
(Security level pricing and, analytics),
returns)
Barclays Capital Live
EMEA Convertibles Index Page(keyword:
EMEAconverts)
Analytics & Research
Benchmark Indices
(keyword: Index)
Index Data
(index returns, and analytics)
Constituents
(Security level pricing and, analytics)
Note: Similarly for the Asia Pacific Index. Source: Barclays Capital
In Figure 52 (EMEA) and Figure 53 (Asia Pacific), we provide a list of joiners and leavers for each month since the start of the year, which we believe reflects the clear and rational nature of our membership criteria and monthly rebalancing process.
CB Insight™ can be accessed via a direct link, using the keyword
or by navigation within Barclays Capital Live
We launched our new EMEA Convertibles Index in June 2010
and Asia Pacific in January 2011, completing our family of regional
convertible indices
New Asia Pacific Convertibles Index also provides for Asia ex-
Japan and Japan separately
We believe that the objective and transparent criteria provides an intuitive monthly rebalancing
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Barclays Capital | Convertible Outlook Q2 2011
5 April 2011 37
Figure 52: EMEA Convertibles Index joiners and leavers since December 2010
Month End Joiners Leavers
Dec 10 Emaar Properties 7.5% 2015 Dana Petroleum 2.9% 2014
Lukoil 2.625% 2015 Emaar Properties 7.5% 2015
Kloeckner 2.5% 2017
Orpea 3.875% 2016
Talvivaara 4% 2015
Jan 11 CGGVeritas 1.75% 2016 Seadrill 4.875% 2014
Industrivarden 1.875% 2017
Feb 11 Essar 4.25% 2016 Wereldhave 2.5% 2011
Pierre et Vacances 4% 2015
Mar 11 Immofinanz 4.25% 2018 LLB 1.65% 2011
Ingenico 2.75% 2017 Tabreed sukuk 2011
Steinhoff International 4.5% 2018
TUI 2.75% 2016
Note: Convertibles listed are the changes implemented at the respective month-end rebalancing date. Source: Barclays Capital
Figure 53: Asia PacificConvertibles Index joiners and leavers since December 2010
Month End Joiners Leavers
Dec 10 Kaisa 8% 2015 Berlian Laju Tanker 0% 2012
Videocon 6.75% 2015 Best Decade - Delong 0% 2012
Bumi Resources 5% 2016
KCC - Hyundai Heavy 3.5% 2014
Melco PBL 2.4% 2012
Pine Agritech 0% 2012
Ricoh 0% 2011
Jan 11 Asia Cement - FENC 0% 2016 Asia Cement - Far Eastern 0% 2013
Epistar 0% 2016 Bajaj Hindusthan 0% 2011
Hindustan Construction 0% 2011
IOI 0% 2013
Pioneer (6773) 0% 2011
Rajesh Exports 0% 2012
SJM 0% 2015
Feb 11 BTS 1% 2016 China Milk 0% 2012
KCC - Hyundai Heavy 0% 2012 (B)
KCC 0% 2012 (A)
Keystone Capital 0.1% 2011
Matsui Securities 0% 2011
Mitsui Osk Lines 0% 2011
Nikon 0% 2011
Pacific Basin Shipping 3.3% 2013
Ranbaxy 0% 2011
Mar 11 IHI 0% 2016 China High Speed 0% 2011
Tatung 0% 2014 Khazanah - Tel Malaysia 1.25% 2011
Yamato 0% 2016 Reliance Communication 0% 2011
Note: Convertibles listed are the changes implemented at the respective month-end rebalancing date. Source: Barclays Capital
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Barclays Capital | Convertible Outlook Q2 2011
5 April 2011 38
CONVERTIBLE BOND RESEARCH ANALYSTS
Barclays Capital 5 The North Colonnade London E14 4BB
Luke Olsen +44 (0)20 7773 8310 [email protected] Barclays Capital, London
Heather Beattie, CFA +44 (0)20 7773 5859 [email protected] Barclays Capital, London
Angus Allison +44 (0)20 7773 5379 [email protected] Barclays Capital, London
Analyst Certification(s)
We, Luke Olsen, Angus Allison and Heather Beattie, hereby certify (1) that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.
Important Disclosures
For current important disclosures, including, where relevant, price target charts, regarding companies that are the subject of this research report, please send a written request to: Barclays Capital Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to http://publicresearch.barcap.com or https://ecommerce.barcap.com/research/cgi-bin/all/disclosuresSearch.pl or call 1-212-526-1072.
The analysts responsible for preparing this research report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by investment banking activities.
Research analysts employed outside the US by affiliates of Barclays Capital Inc. are not registered/qualified as research analysts with FINRA. These analysts may not be associated persons of the member firm and therefore may not be subject to NASD Rule 2711 and incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst’s account.
On September 20, 2008, Barclays Capital acquired Lehman Brothers' North American investment banking, capital markets, and private investment management businesses. All ratings and price targets prior to this date relate to coverage under Lehman Brothers Inc.
Barclays Capital produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other types of research products, whether as a result of differing time horizons, methodologies, or otherwise.
Risk Disclosure(s)
The convertible valuations are based on Barclays Capital proprietary convertible valuation model, under which key assumptions relate to credit spread and equity volatility metrics. Material changes in any of these variables can have a significant impact on valuation. Upside/downside analysis takes into consideration likely future valuation and expected trading patterns, among others. It is based on a total return participation of the convertible relative to a +/‐ 25% (unless otherwise specified) change in the common stock’s price over a one‐year investment horizon. A material change in the company’s financial situation can significantly alter this assessment.
Barclays Capital, the Investment Banking Division of Barclays Bank PLC, is acting as corporate broker to Subsea 7 S.A.
Guide to the Barclays Capital Fundamental Equity Research Rating System:
Our coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2- Equal Weight or 3-Underweight (see definitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry sector (“the sector coverage universe”). To see a list of companies that comprise a particular sector coverage universe, please go to http://publicresearch.barcap.com.
In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutral or 3-Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone.
Stock Rating
1-Overweight - The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.
2-Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.
3-Underweight - The stock is expected to underperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.
RS-Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including when Barclays Capital is acting in an advisory capacity in a merger or strategic transaction involving the company.
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5 April 2011 39
Sector View
1-Positive - sector coverage universe fundamentals/valuations are improving.
2-Neutral - sector coverage universe fundamentals/valuations are steady, neither improving nor deteriorating.
3-Negative - sector coverage universe fundamentals/valuations are deteriorating.
Distribution of Ratings:
Barclays Capital Inc. Equity Research has 1560 companies under coverage.
43% have been assigned a 1-Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 53% of companies with this rating are investment banking clients of the Firm.
43% have been assigned a 2-Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 45% of companies with this rating are investment banking clients of the Firm.
11% have been assigned a 3-Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 38% of companies with this rating are investment banking clients of the Firm.
Barclays Capital offices involved in the production of equity research:
London Barclays Capital, the investment banking division of Barclays Bank PLC (Barclays Capital, London)
New York Barclays Capital Inc. (BCI, New York)
Tokyo Barclays Capital Japan Limited (BCJL, Tokyo)
São Paulo Banco Barclays S.A. (BBSA, São Paulo)
Hong Kong Barclays Bank PLC, Hong Kong branch (BB, Hong Kong)
Toronto Barclays Capital Canada Inc. (BCC, Toronto)
Johannesburg Absa Capital, a division of Absa Bank Limited (Absa Capital, Johannesburg)
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