Salomon now more confident that 2002 issuance will hit or beat $50 billion-plus

By Ronda Fears

Nashville, Tenn., Nov. 8 - With the surge in new issues in the latter part of October, Salomon Smith Barney is now saying that convertible issuance will likely meet or exceed $50 billion for 2002.

In each of the previous three months, the firm's convertible research group lowered their outlook. Early in the year, Salomon had estimated issuance would reach $80 billion for 2002.

"The recent pick up in new issuance gives us some confidence (finally...) that the total for 2002 will ultimately meet our $50 billion-plus estimate of proceeds," said Salomon convertible analyst Stuart Novick in a report.

"We are not forecasting a return to the issuance trends from early in the year, but we are sticking with our $50 billion-$60 billion full year projection for new convertible proceeds. If new issuance holds at $1.7 billion or so per month, we'd reach the $50 billion threshold."

Thus far in 2002, he said, a total of 101 new convertibles have come to market pulling in $46.6 billion. A year ago, through the end of October, there were 164 deals totaling $82.9 billion.

"Not a single new convertible was issued in the first half of October as the equity markets continued their protracted slide," Novick said.

"However, with equities rebounding strongly in the latter half of the month, convertible issuance picked itself up from the floor and six issues came to market generating proceeds of over $2.9 billion."

While on a year to date average basis those results aren't all that impressive (about 10 issues per month and average monthly proceeds of approximately $4.9 billion), they nevertheless represented four-month highs.

The $1.7 billion mark also seems like small potatoes compared to the monthly average proceeds for the year as a whole, but compared to average monthly issuance in the second half of the year so far it's a lot. Since July, he said, monthly averages have tanked, falling to around 3.5 deals and $1.3 billion in funds.

"Nevertheless, conditions for new issuance seem to be on the mend heading down the stretch this year," Novick said.

"The strong rebound for the equity markets during the past few weeks should give confidence to potential convertible issuers."

From an intra-month low in October, the Dow Jones Industrial Average climbed over 15% by month end.

The Nasdaq was up an even more impressive 18% off of its mid-October low.

"The sharp reversal of a four month downtrend for equities in general has potential convertible issuers enjoying firmer and higher stock prices, lessening their reluctance to issue more shares (at an even higher price) several years forward via a convert," Novick said.

Other positives for convertible issuance, he added, are low interest rates and strong demand as net convertible market shrinkage continues to force investors to look for new buying opportunities. And he noted that convertible arbitrage funds continue to post index-beating return numbers.

Also, alternative sources of funds, such as banks, are not yet stepping up, Novick said.

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