Citigroup analyst cites CoCo issue, soggy stock market for falloff in deal flow

By Ronda Fears

Nashville, Aug. 2 - Citigroup Global Markets Inc. convertible analyst Stuart Novick said the virtual disappearance of convertible issuance in July was due in part to an accounting task force recommendation to end the hidden share provision attached to contingent conversion issues, but it wasn't the only culprit.

Novick also pointed to the "soggy equity market performance and sagging volatility" along with uncertainty over possible interest rate hikes.

"The changes will not impact the balance sheets or cash flows of the affected companies but the potential rule changes have caused concern on the part of investors (mostly of the equity variety, in our view) many of whom were unfamiliar with the existence and mechanics of these features," Novick said in the report.

"The upshot for the convert market is that would-be issuers are reluctant to issue 'CoCos' until the matter is sorted out. That may not happen for a couple of months, although at least one recent issue, the Ocwen Financial bonds came with a CoCo feature plus wording which would negate the provision should the FASB rule to rescind the anti-dilution aspect behind the CoCo. This type of 'contingent contingent conversion' (or CoCoCo, for short) feature could become a temporary fixture in convertible issuance."

With only six new issues for $1.2 billion in proceeds, July was the slowest month for convertible issuance since October 2002 when only five deals were done; in terms of proceeds raised, the $1.2 billion was the lowest since September 2002 when monthly new-issue proceeds was around $900 million.

But the climate was more buyer friendly.

"From an investor standpoint, new-issue terms improved last month," the analyst said.

"While we would hesitate to put too much emphasis on last month's results given the minimal level of activity, at 4.49s up 27.76%, the weighted average new issue in July had the friendliest terms since December of '02 when the averages were 4.87s up 27.83%."

Through July, the weighted average terms for new convertibles in 2004 were 3.18% up 37%.

New issue size still small

New issue size - $206 million, or a median of $163 million - remained small, however, furthering concerns in the secondary market, he said.

"This trend has impacted secondary market liquidity, in our opinion, as does the reemergence of true private placements, of which there was one in July," Novick said.

"Secondary trading remains a concern. The small convertible size and the relatively small market caps of the new deal issuers themselves have dampened after-market liquidity in these new deals. Anecdotal evidence suggests that many of these small issues trade infrequently at best in the weeks after coming to market since large convertible investors cannot establish large enough positions, let alone be able to borrow some of these stocks (and we're not even mentioning the recent spate of true private placements which may not trade at all for extended periods)."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.