Convertible market expects more mandatory issues as companies shore up balance sheets

By Ronda Fears

Nashville, Tenn., June 3 - The convertible market is expecting more of the same in term of issuance - mandatory issues from large-cap names and bonds from small-caps - at least near term. Indeed, four new mandatory issues are slated to price this week for a total of $1.6 billion.

"In the previous quarter, we saw a lot of mandatories in dual-tranche deals where a convertible was sold alongside common stock," said Craig Farr, head of convertible origination at Salomon Smith Barney.

"That trend is going to continue, I think, especially among the large-cap issuers as they use the high equity content to enhance their balance sheets."

For 2002, Farr said he still sees issuance of a total $70 billion to $80 billion.

In May, Salomon was the second lead underwriter of convertibles, just less than $1 million behind Goldman Sachs & Co., according to Prospect News data.

Mandatory convertibles have accounted for 23.5% of year-to-date proceeds versus 13.3% for the same period in 2001, according to Kimberlee Brody, convertible analyst at Wachovia Securities.

Brody also noted that the convertible market continues to attract new entrants with those issuers making up some 61% of new-deal proceeds so far this year.

Small-cap issuers are seen bringing most of the vanilla bond deals, and a few zero-coupon deals. That group is also seen adding in more contingent features, as well.

"With $9 billion of mandatories already, due to the balance sheet restructuring that is going on, issuance is skewed, at least near term, toward mandatories. I'm bullish on the mandatory sector, and straight preferreds, as well," said Jeff Siedel, head of U.S. convertible research at Credit Suisse First Boston.

"Coming out of recessions, this is typically where convertibles serve the market well."

Seidel noted the Ford mandatory in the early 1990s and the automaker's deal earlier this year, both in times of recession when the company needed balance sheet bolstering.

This week, there are four more mandatory issues slated.

Nortel is bringing a $750 million deal, FPL Group has a $400 million deal, American Electric Power a $300 million deal and Provident Financial is bringing a $150 million deal to market.

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