Primary market hopes on hold, but not forsaken

By Ronda Fears

Nashville, Tenn., Feb 8 - The turbulence that has rocked the stock market, as well as the convertible market, has put a damper on both the primary and secondary market but onlookers still expect that the hopes for strong issuance of convertibles in 2002 will bear out. Venu Krishna, head of convertible research at Salomon Smith Barney, said the market's viability should be none the worse for the hiatus.

"We've been having an energetic new issues market. Taking a breather now and then is not a bad thing," Krishna said. "The market has matured a lot over the past few years. I don't think we're going backward to a $15 billion year, but it's difficult to say we're to have another year of 50% growth."

What it will take to shoo issuers out of the wings and into the market rests almost entirely on the stock market, because the investment bankers say there are lots of deals in the shadows and buyers say there is very strong demand. The only problem is where the issuers' stocks are trading.

"Demand is there. The environment is just so bad, it has everyone spooked," said a convertible fund manager in New York.

"Fortunately, or unfortunately, depending on how you look at it, there is also a lot of companies out there that need to issue something like a mandatory convertible to shore up their balance sheets. What makes that sort of thing scary is that they are somewhat in trouble by the nature of what they need to do, and then there's all the accounting and disclosure concerns that have been raised."

Some buy-side sources said the events of the past few weeks will likely turn new issue terms to the favor of buyers after having been slowly shifting toward issuers. Salomon research shows that new issues in January were sold at an average 1.87% discount to fair value, versus the 2.53% cheapness seen in 2001. But, terms were moving in favor of buyers as the average yield for new deals January gained 171 basis points to 5.86% from the 2001 average of 4.15% and premiums shrank by 487 basis points to an average 24.23% from the 2001 average of 29.1%.

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