Merrill: Speed, at-issue discounts, higher equity sensitivity highlight convertible issuance

By Ronda Fears

Nashville, Tenn., Dec. 6 - Convertible underwriting continued the year's relentless pace despite the shadow of Enron's looming bankruptcy, as November saw 23 deals price for proceeds of $9.5 billion, said Merrill Lynch & Co. head of convertible research Anne Cox in a recent report. Speed continued to be the name of the execution game as five issues, $2.7 billion in proceeds, priced on an overnight or pre-open basis.

New deals were priced to move and participate, Cox said in the report. The average at-issue discount to fair value for November's crop of deals was 5.4%, a bit higher than the 4.2% level posted in October.

Secondary performance was generally weak, but failed to squelch investor demand for new paper, Cox noted. The weighted average discount to theoretical value for the Merrill Lynch new issue index edged higher in November to 4.9% compared to 3.5% for our broadest index, widening the gap slightly in the favor of new issues. While the discount for new issues was higher than the broader convertible market, the Merrill report showed that returns for new issues beat the rest of the pack.

"The new issue index, up 5.2%, handily outpaced the broad market, up 2.7%, soaring on the twin engines of high delta and underlying stock advances over the month," Cox said in the report. Year-to-date "calendar players have been rewarded by solid out-performance with only a 1.1% decline in new issues versus the 6.4% decline for the broad market."

Equity sensitivity was high for deals priced throughout the month as cash pay bonds and mandatory preferreds dominated the calendar, lending balance to the steady diet of zero coupon offerings served up earlier in the year, the report noted. Contingent conversion and contingent payment features remained prevalent and most mandatory offerings were structured as separable securities to minimize dilution.

Redemption activity remained light with $2 billion for the month and $32.5 billion for the year through the end of November. On a year-to-date basis the convertible market continues to set records with $95.1 billion through month end.

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