Citigroup convertible analyst notes strong 2003 new issue finish likely to spill into 2004

By Ronda Fears

Nashville, Jan. 2 - December convertible issuance made for a strong finish to a strong year, which will likely spill into the new year, said Stuart Novick, convertible analyst at Citigroup Global Markets Inc. in a report Friday.

"December 2003 was the second best December on record for convertible issuance in the U.S. The month marked a frenetic wrap up to a busy year for convertible issuance in the U.S. In sum, there were 25 new convertibles issued last month, generating a total of almost $6.6 billion," Novick said.

That made December 2003 the second best December ever for new issue proceeds, trailing only December of 2001 ($9.8 billion), and the best December for the number of new issues, at 25, besting the 21 deals brought to market in December of 2001.

Usually, a good December spills into January.

Thus, the analyst said, "Given the healthy level of activity in December, we believe that January will set the tempo for a strong year for convertible issuance in 2004. On balance, our indications of demand remain bullish as we move into 2004."

"A busy December new issue calendar - rather than leading to a quiet January as issuers rush to hit the tape before the end of the year, essentially 'borrowing' from the January calendar - usually leads to a busy start of the new year as far as new issuance goes," he added.

"In fact, over the last five years, the better the month of December was for new issue proceeds, the better the January immediately following."

New issue terms were slightly more aggressive in December, he noted, with weighted average new issue terms of 2.5% up 39.4%.

"While repricings won't go away, they aren't as much a concern as they initially may have been, but issues repriced below par look like the guests that wouldn't leave. We understand there were three such offerings last month, all of them low coupon issues - the Genzyme 1.25s, the Akamai 1s and the Emulex 0.25s were all sold at roughly 1 or 2 points below par," Novick said.

"When repricings first appeared early in 2003, some convertible market participants may have been under the impression that no new deals - regardless of issuer or terms - were worthy of consideration at par," he added.

"The more recent thinking is that the aggressiveness of sell-side firms and their willingness to bid for deals is what pushed pricing beyond a level at which it made sense to buy, hence some deals needed to be sold at a lower price to entice significant buy interest."

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