Citigroup: Convertible issuance outlook bleak after May's dismal tally of under $1 billion

By Ronda Fears

Nashville, May 31 - In light of the paltry $938 million showing in U.S. convertible issuance for May - the worst month in about 2.5 years - Citigroup Global Markets Inc. convertible analyst Stuart Novick said in a report Tuesday that the near-term outlook for convertible issuance does not look good.

"For one thing, the pipeline of deals that are actually pending completion is more or less empty," he said in the report. "Even beyond the next week or two, it's likely that stubbornly low interest rates and the rumored demise of convertible arbitrage would limit the supply and appetite for new convertible paper."

Near-term pick-up unlikely

A pick up in convertible issuance in the near term does not seem likely, he said, adding that "the list of new issues on the docket is pretty much blank."

Moreover, despite the net negative flows from the convertible universe - $6.1 billion left the market in May - long time participants have not been eager to buy the few new issues that have come due to concerns over possible investor redemptions and portfolio liquidations among other things, especially out to the end of June when second-quarter fund redemptions would be paid out.

That, he noted, implies there could be further selling ahead.

Additionally, low interest rates, despite recent Fed hikes, curtail a convertible's relative attractiveness for issuers, he said. An increase in privately placed deals also limits demand to better capitalized, more risk tolerant buyers. And, he added, investment bankers needing to put something "on the tape" continue to underwrite aggressively priced issues even though they wind up being too pricey to sell.

This causes a lack of buy interest that leads to less new issuance, he said, further extending the cycle.

May a weak month

Citigroup tallied May's convertible issuance in the United States at just $938 million, through a meager four deals. Those results made it the weakest month for new issues since September 2002 when three deals brought in $900 million, Novick said.

The year-to-date total, from 46 deals, with proceeds of $10.3 billion is just as depressing. Through the first five months of 2004, Citigroup counted 100 new issues with proceeds of $26.4 billion.

Weighted average terms, such as they were, tightened up a bit on the yield side, at 3.72%, although they moderated on the premium side, winding up at a three-year low of 21.9%, he said.

But to put the 2005 outlook in perspective, Novick said if one pro-rated this year's five-month results, he said, that would make it the weakest year for convertible issuance since 1997 when 105 issues raised $21.8 billion.

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