Creativity keeps new-issue market activity in line with forecasts despite tough conditions

By Ronda Fears

Nashville, Tenn., March 28 - With right around $30 billion of new issues through the end of the first quarter, convertible primary activity appears to be in line with forecasts for the year. It's been a tough go of it, however, and issuance probably would not be as healthy as it is without some innovations.

"The convertibles market has recently shown a trend towards more custom structures which are tailored to issuers' need," said Rick Pearson, a vice president at Deutsche Banc Alex. Brown.

With first quarter volume near $30 million, the market is on track to exceed the $105 billion in 2001, he said. In 2001, convertibles set another record for issuance with a twofold gain to over $100 billion.

For the quarter, Kimberlee Brody, a convertible analyst at Wachovia Securities, puts first quarter issuance at $28.6 billion, a 25% increase from first quarter 2001.

Prospect News estimates first quarter issuance at $31.7 billion, including greenshoes and synthetic issues by dealers.

Adrian Miller, a convertible analyst at Salomon Smith Barney, said you cannot just extrapolate issuance from one quarter into a projection for the year. He believes issuance will still come in for 2002 at about $80 billion to $85 billion.

"We are looking for a 20% decline from last year and we're still there," Miller said.

"We think it's on target so far."

Innovative structures have driven a considerable amount of issuance this year, though, in a tough climate of credit quality concerns and the market anticipating a move toward higher interest rates.

Pearson noted the emergence of floating-rate convertibles, issuers using convertibles to buy back stock and the Computer Associates issue in which the company sold a $660 million convert and simultaneously purchased a call spread on its own stock.

"This allowed Computer Associates to effectively issue a 80% premium convertible which would otherwise not have been possible," Pearson said.

The use of convertibles to finance stock buybacks has been fairly strong with over $4 billion completed since February, Pearson noted. Such deals have been done by Amgen, Omnicom, Pride, Cracker Barrell and AmerUs.

"By issuing a convertible bond at a 20-30% premium, while simultaneously buying back stock at a 0% premium, issuers can lock in a gain so long as the convertible converts," Pearson said.

"If the convertible does not convert, then the issuer has simply completed a stock buyback with a low financing cost."

Another notable deal so far in 2002 is the two-tranche $25 par bond issue by General Motors Corp. for a total of $3.75 billion, including the greenshoe. The par was lowered from the customary $1,000 to attract equity investors.

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