The German corporate bond market is, like many other markets, subject to a constant development: New external conditions and changes in our economic environment always trigger new trends that can be observed when analysing the structure of capital markets. Particularly during the last months, a new significant tendency could be observed in Germany: As market statistics indicate, more and more German corporations decide to issue equity-linked securities such as convertible bonds instead of raising capital using straight corporate bonds or equity. Consequently, investors are now faced with a new asset class beyond debt, cash or equity. This implies more opportunities but also bears some risks, problems and pitfalls as each convertible has specific characteristics and covenants which have to be taken into account by the investor. The purpose of this study is to reveal the reasoning behind the growing popularity of convertibles within the German corporate bond landscape. In this context, the consequences and opportunities for the investor are emphasized as the paper shows how asset managers can benefit from the particular characteristics of convertibles. Moreover, the price reaction of the underlying share price on an announcement of a convertible issue will be analysed. In order to avoid a too theoretical approach, two extraordinary equitylinked issues that took place in Germany in 2003 are discussed and compared.
Table of Contents
1 Introduction
1.1 Nature of the Problem and Objectives of the Study
1.2 Methodology and Structure
2 The German Corporate Bond Market
2.1 Historical Development of the German Corporate Bond Market
2.2 Recent Trends in the German Corporate Bond Market
3 Convertible Bonds: Alternative for Asset Managers?
3.1 The Main Characteristics and Functionality of Convertible Bonds
3.2 The Valuation of Convertible Bonds
3.3 Convertibles as an Asset Class for Portfolio Managers
4 Case Study 1: The Mandatory of Deutsche Telekom AG
4.1 Background and Conditions of the Issue
4.2 The Mandatory Convertible from the Issuer’s perspective
4.3 The Mandatory Convertible from the Investor’s perspective
5 Case Study 2: The Exchangeable of KfW
5.1 Key Facts of the Issue
5.2 Reasoning behind the Deal
5.3 Benefits for the Investor
5.4 Market Reaction on Announcement
6 Conclusion and Outlook
Objectives and Core Themes
This paper examines the growing prominence of equity-linked securities, specifically convertible bonds, within the German corporate bond market. It aims to determine why German corporations are increasingly utilizing these instruments and how they serve as both a strategic financing tool for issuers and a versatile investment vehicle for portfolio managers.
- The historical development and current trends of the German corporate bond market.
- Functionality, valuation, and risk/return profiles of convertible bonds.
- In-depth analysis of mandatory convertibles via a Deutsche Telekom case study.
- Examination of exchangeable bonds through a KfW case study.
- The impact of market announcements on underlying share prices and hedge fund involvement.
Excerpt from the Book
3.1 The Main Characteristics and Functionality of Convertible Bonds
In general, convertibles are bonds with an embedded option which gives the investor the right to convert the bond into a pre-specified amount of shares of the issuing company. Consequently, debt can be converted into equity by the investor which makes sense if the underlying share price is higher than the contracted “conversion price” which is comparable to the strike price of a normal option. Thus, a convertible is an ordinary straight bond plus a call option to exchange the bond into shares. Investors typically “pay” for this right by accepting a lower coupon compared to straight bonds of the same issuer or risk class respectively. This is the most important advantage and a common argument for the issuer, who benefits from significant lower interest costs of the convertible. Besides, normally the debt agreements or “covenants” are less restrictive relative to a non-convertible bond issue which finally offers more possibilities and a higher flexibility to the issuer. Moreover, because of the conversion, temporarily granted debt might be changed into equity which is not redeemed.
Summary of Chapters
1 Introduction: Introduces the research problem regarding the rise of equity-linked securities in Germany and outlines the study's structural approach.
2 The German Corporate Bond Market: Provides historical context and recent trends, highlighting the shift toward capital market financing.
3 Convertible Bonds: Alternative for Asset Managers?: Details the functional, valuation, and portfolio-specific characteristics of convertible securities.
4 Case Study 1: The Mandatory of Deutsche Telekom AG: Analyzes the issuance of a €2.3bn mandatory convertible from both issuer and investor viewpoints.
5 Case Study 2: The Exchangeable of KfW: Discusses the motivation, structure, and market reception of the €5bn KfW exchangeable bond linked to Deutsche Telekom.
6 Conclusion and Outlook: Synthesizes key findings and offers a future outlook on the role of equity-linked products in the German market.
Key Words
Convertible Bonds, Mandatory Convertible, Exchangeable Bonds, German Corporate Bond Market, Asset Management, Equity-Linked Securities, Valuation, Risk/Return Profile, Hedge Funds, Deutsche Telekom, KfW, Market Efficiency, Capital Structure, Privatisation, Downside Protection.
Frequently Asked Questions
What is the primary focus of this work?
The paper explores the rising popularity of equity-linked securities in Germany, analyzing their utility for corporate financing and their strategic benefits for asset managers.
What are the central themes of the analysis?
Key themes include the structural shift in German debt financing, the mechanics of hybrid capital instruments, and the specific market dynamics surrounding large-scale convertible issues.
What is the core objective of the study?
The study aims to explain the reasoning behind the increased issuance of convertibles in Germany and to assess their impact and performance from the perspectives of both issuers and investors.
Which scientific methodology is employed?
The research uses a descriptive and analytical approach, combining market statistics with detailed case study analysis of two major 2003 transactions.
What topics are covered in the main section?
The main section covers the valuation of convertibles, their role as an asset class, and specific case studies focusing on Deutsche Telekom’s mandatory bond and KfW’s exchangeable bond.
How can this work be categorized by its keywords?
The work is characterized by terms such as Convertible Bonds, Mandatory, Exchangeable, Risk-Return Profile, Capital Structure, and German Corporate Bond Market.
How does a mandatory convertible differ from a traditional one?
Unlike traditional convertibles, a mandatory convertible must be converted into common stock at maturity regardless of the share price, meaning it lacks the standard downside protection of traditional bonds.
Why did hedge funds show such significant interest in these issues?
Hedge funds frequently use these instruments for short-selling strategies, aiming to capture risk-less profits (arbitrage) by capitalizing on market inefficiencies or temporary price misalignments.
- Quote paper
- Eckhard Scharmer (Author), 2003, Corporate Bonds in Germany: Market and Valuation, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/22591
