New convertible issues slow in July, but 2007 still on pace to surpass 2006, Citigroup says

By Evan Weinberger

New York, July 31 - Although new convertible issuance slipped in July, the number of deals and dollar volume raised made it the busiest July since 2003, according to a report by Citigroup released Tuesday.

While widening credit spreads and increasing volatility in the stock markets may slow down new issues, the report continues, it would take a total stoppage in new deals for 2007, which has already seen over $61 billion in new issues, to finish below 2006 levels.

According to the report, compiled by Citigroup convertibles analysts Stuart Novick, Adrian Miller and Lynn Hambright, 12 new deals raised a total of around $3.6 billion. According to the report, 27 new convertibles were issued in June raising a total of around $8 billion. It was the busiest July for new issues since 2003, when there were 42 new convertibles raising $9 billion.

Meanwhile, market conditions from outside the convertibles universe have combined to increase deal cheapness for convertibles investors. The average yield hit a 2007 high of 3.68%, the report says, while average conversion premiums fell to 25.5%, a four-month low.

"Pricing continues to inch in favor of convert investors as widening credit spreads have buyers demanding higher yields and stock market pessimism pushes new issue premiums down," the report says.

Another factor increasing yields is the types of companies that are issuing convertibles.

"With the mix of convert issuers seemingly shifting back towards smaller, less well capitalized companies for which there may be fewer financing options, investors are getting more of a yield for buying some of these new issues," the analysts say.

Year to date only 16% of new convertibles have been issued by investment-grade companies, with an average yield of 3.3%. In 2006, 41% of new convertibles were issued by investment-grade companies, and the average yield was 2.8%.

Because of the drop in investment-grade companies issuing convertibles, the average deal size dropped to $297 million in July, the lowest this year since January's average size of $266 million. At the same time, 42% of new issues were upsized in July, up from the 34% year to date. But only 42% of over-allotment options were exercised, down from 59% year to date.

Only two new issues - the two tranches in Newmont Mining Corp.'s offering - came in at the aggressive end of price talk in July. The 17% of aggressively-priced issues was down from 23% for 2007 so far.

Add concerns about proposed accounting changes from the Financial Accounting Standards Board affecting convertibles with net-share settlement agreements and the usual August slowdown to the macro-economic concerns, and the Citigroup convertibles analysts expect a lull in new issue offerings.

"Nevertheless, with year to date convert issuance now above $61 billion, it would take a complete shutdown in deal flow to keep 2007 from surpassing last year's full year proceeds of $71 billion, making '07 the third strongest year ever for convert issuance in the U.S.," the report says.

The report also notes that there are nearly $3 billion in convertibles set to mature in August, led by the $2 billion UBS exchangeable into Time Warner Inc. issued 18 months ago.

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