Bear Stearns convertible analysts see strong 2002 issuance, more coupon bonds

By Ronda Fears

Nashville, Tenn., Jan. 31 - As issuers look to raise capital or refinance debt at the cusp of low interest rates, Bear Stearns & Co. convertible analysts predict a strong new issue market for 2002, although not at the record level of 2001. With investors focused on total return, the analysts assert vanilla coupon bonds and mandatory convertible structures will dominate issuance in 2002, putting an end to the zero craze.

"The present low interest rate environment will give companies an incentive for raising further financing or refinancing present debt. New issues will remain strong throughout 2002 as the uncertain economic future and the desire for income and downside protection fuels the convertible market," said Bear Stearns convertible analysts Yaw Debrah and John Wright in a report.

Issuance will be strong, the analysts said, but not as good as 2001 - another record year for convertible issuance with more than 200 deals raising more than $104 billion in gross proceeds by Bear Stearns' calculations. The previous year saw 141 new issues totaling around $56 billion in proceeds.

The Bear Stearns analysts foresee a "U" shaped economic recovery marked by interest rates remaining low throughout 2002.

"More importantly, the equity market is expected to have modest gains next year and this will force investors to look for more income enhancing ways to play the convertible new issue market. With an investor focus on total return, plain coupon debentures and mandatory convertible structures will dominate issuance in 2002," the analysts said.

"In addition, with the economy predicted to remain weak in the first half of 2002, investment grade issuance will continue to play a large role in the primary market as investors look for securities that offer better credit protection with higher bond floors. Last year we saw zero-coupon investment grade debentures dominate new issue activity. However, in an environment where investors are looking for income, we expect the level of zero coupon issuance to be sharply down on last year."

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