S&P: Convertible issuance benefits from low rates, hampered by stock gains

Nashville, March 24 - Standard & Poor's analysts said in a report Wednesday that they expect global convertible issuance to be strong in 2004 but much lower than 2003 as low interest rates should bolster issuance while stock gains could detract from demand. S&P made no specific volume prediction.

"Expectations that interest rates have reached an inflexion point could prompt a rise in new issues," said S&P analysts Diane Vazza and Devi Aurora, noting that the most recent round of rate hikes in the U.S. from mid-1999 to mid-2000 supported a 44% increase in convertible issuance for those 12 months.

In this round, even though broad equity indexes globally have recorded visible gains since the start of 2003, the potential to capitalize on equity appreciation potential in specific sectors has certainly not yet been exhausted.

But, the analysts added, "If share prices continue to increase, however, the appetite for convertibles could dwindle, since firms would opt in favor of issuing lower-cost equity in place of debt."

In the first two months of 2004, S&P said net new flows into convertible funds were running 27% above year-ago levels. S&P noted that Strategic Insight Mutual Fund Research indicates that net new flows into convertible funds increased to $1.3 billion in December 2003 versus $114 million in December 2002.

Scott Holtzman contributed to the S&P report.

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