S&P bearish on convertible issuance for remainder of 2002

By Ronda Fears

Nashville, Tenn., June 26 - Convertible issuance globally so far this year has been below year-ago record levels, and Standard & Poor's believes the remainder of the year will follow suit.

In a report Wednesday, S&P analysts Dianne Vazza and Devi Aurora noted that in the first two quarters, or Jan. 1 though June 20, issuance of $51 billion is down from $83 billion in the first half of 2001. Issuance in 2001 was a record, standing globally at $142.2 billion, according to S&P.

"As for our outlook, we expect that the market is still going to be down," said Vazza in an interveiw.

"We do not see a big uptick in the second half."

But Vazza stressed that issuance a year ago was at record levels.

Also, refinancing corporate bonds as an opportunity for new issues will be limited going forward, she said.

"Even though equity market volatility has not dissipated and interest rates remain relatively low, the appetite for convertibles has dulled," the analysts said in the report.

Telecom's fall from grace is partly to blame, the analysts said, noting that 25% of 2001 issuance came from telecom names.

"Jumbo issuers such as France Telecom, which was the single largest issuer last year raising $7.3 billion, are likely to face increased liquidity pressure as some investors could potentially cash out of formerly purchased convertible bonds in anticipation of not being able to realize the potential equity gains on these securities," the analysts said.

So far this year, the analysts noted, telecom issuance dried up. The only sector gaining was financial institutions, excluding banks.

Yet the analysts said that credit quality in the total issuance picture is lower than a year ago.

"Global convertible issuance appears to have migrated lower down the ratings spectrum in comparison with a year earlier," the analysts said in the report.

New issues in the BBB range rose to 33.8% of the total this year through June 20, versus 27.3% in the prior year period. Meanwhile, the proportion of new issues in the A range fell to 29.8% compared with 40.1%.

"The downward ratings migration over last year appears to have been caused by a total lock of issuance by prominent telecommunications issuers such as France Telecom, Hutchison Whampoa Ltd., Cable & Wireless plc, as well as rating downgrades among formerly A-rated issuers like Tyco International," the analysts said.

The drought in the U.S. market is the chief culprit in the decline globally, the analysts said.

U.S. issuance made up 48% of the worldwide total so far this year, compared with 58% a year earlier.

"The steep decline in U.S. convertible issuance mirrors an overall deceleration in bond issuance from sharply elevated levels last year," the analysts said.

"A drop-off in refinancing activity from record levels as well as receding expectations for an upturn in the equity market contributed to weaker demand for convertible new issues."

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