Barclays adds Telecom Italia, HVB/E.On, BAE/Vodafone, 3i to euro list

By Ronda Fears

Nashville, Oct. 31 - Barclays Capital Markets euro convertible analysts Luke Olsen and Haidje Rustau said they were less comfortable with exposure to AAA rated paper and their credit-based sector recommendations are to overweight telecom and underweight industrial and food & retail.

In the first nine months of 2003, the analysts reported performance of the Barclays recommended convertible bond list delivered a total return of 5.9% with an annualized standard deviation of 1.8% - superior risk adjusted returns although underperforming its benchmark in the third quarter on a non-risk adjusted basis.

On an individual security basis, the performance was mixed with eight of the 20 bonds delivering negative returns. However, all total return figures were within the narrow band of negative 1.3% to a positive 2.3%.

The best performer in the third quarter was Nestle's 0% due 2008, up 2.30%, although with comparatively volatile returns. The worst performer was Roche's 0% bond due 2021, down 1.34%.

The most volatile performance came from KfW's 0.75% exchangeable due 2008, which converts into Deutsche Telekom, with a negative 0.77% return on a 5.6% annualized standard deviation. This reflected volatile market conditions in the AAA rated sector as well as the relatively high exposure to the underlying equity, as the bond has a fairly high delta of around 40%, the analysts said.

The analysts replaced four convertibles in the Barclays recommended list of euro convertibles to reflect their credit-based sector recommendations of overweighting telecom and underweighting industrial and food & retail, with a neutral position on all other sectors.

The Lafarge 1.5% due 2006 was replaced with Telecom Italia's 1% due 2005.

"We have a positive view on Telecom Italia's credit fundamentals and hope to take advantage of a potential tightening over coming months," the analysts said. "We are comfortable with having two Telecom Italia bonds in our portfolio as both bonds have a relatively short duration."

KfW's exchangeable into Deutsche Telekom was replaced with HVB's exchangeable into E.On, "as we are now less comfortable with AAA exposure but have a positive view on HVB's credit," the analysts said.

Suez's 1% exchangeable into Vinci due 2003, which matures in November, was removed and the BAE/Vodafone 3.75% due 2006 added, providing some additional exposure to the telecom sector.

Nestle's 0% due 2008, after a good performance in third quarter, was also removed, which the analysts noted additionally helped reduce exposure to AAA credits and the food sector. They added 3i, which they say offers reasonable downside protection, with a distance to its bond floor of 13 points, yet with a delta of 57% so the bond also provides upside participation with the equity.

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