Lehman: New-issue convertible terms cheapened to 2.27% from 1.75% in May

Nashville, June 10 - Average convertible new-issue cheapness improved in May to 2.27% from 1.75% in April, according to a report by Lehman Brothers convertible analysts released Thursday. On a year-to-date basis, average cheapness of new deals stands at 1.75%, essentially in line with the period in 2003.

The report noted that issuance volume rose to $5 billion in May on the back of three large mandatory issues. Average issue size also climbed to $275.3 million from $165.3 million in April.

Year to date, Lehman analysts said convertible issuance totaled $25.9 billion in 98 deals, suggesting a run rate of roughly 70% of the 2003 level of $89 billion.

But, the convertible market saw negative organic growth of $2.3 billion, the analysts said, driven by $6.1 billion of redemptions in May. Year to date, market growth stands at $5.1 billion.

Pricing power more balanced

The average "issuer pricing power indicator" in May was -0.03 compared to +0.46 in April, the Lehman analysts found, suggesting that pricing power was fairly balanced between issuers and investors.

That was determined by noting that of the 18 new issues, five priced at or near the rich end of price talk, seven at or near the midpoint of talk and six at or near the cheap end.

Driven by the three large mandatory issues in the month, the weighted average yield and premium improved for investors. Yields expanded to 4.4% from 2.4% while premiums fell to 31.2% from 37.6%. Year to date, average terms stand at a 2.9% yield with a 37.4% premium.

Mandatory issuance also had an impact on average call protection and break-even for the month. Average hard-call protection for new issues in May decreased to 4 years from 5.9 years, while average break-even narrowed to 4.5 years from 7.7 years in April.

Investment-grade issues contributed 16.8% of gross proceeds in May compared with April and year-to-date levels of 10.7% and 19.3%, respectively.

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