Convertible primary issuance falls 28% in August; organic growth turns negative, Lehman reports

By Rebecca Melvin

New York, Sept. 2 - Convertible primary issuance was subdued in August, with six deals totaling $2.3 billion pricing in the market, down from $3.2 billion pricing in July, according to Lehman Brothers U.S. convertibles research.

Organic growth turned sharply negative in August, with $8.4 billion of net outflows on the back of $9.9 billion of redemptions. Meanwhile, year-to-date organic growth has expanded $18.7 billion, compared with $39.0 billion for 2007, according to the Lehman Brothers research report published Tuesday.

New issue cheapness for August was 3.8%, up from 2.9% in July, and average new issue cheapness for 2008 stands at 3.5%, significantly higher than the 1.5% level for 2007.

Investment-grade paper made up 32.7% of new issues in August, while for all of 2008 so far, investment-grade paper comprises 62% of total deal proceeds, compared with 35.9% in 2007 and 47.7% in 2006.

Weighted-average yields fell to 3.6% in August from 5.1% in July, and average premiums were up at 32.1% versus 25.9% in July.

Year-to-date average new issue terms stand at 6.1% yield and 27.8% premium, compared with 3.3% yield and 30.8% premium in 2007.

New issuance down 11% YTD

For the year to date, new issuance lags about 11% with $60.7 billion raised in the convertible market through 95 deals, compared with $67.7 billion in the comparable 2007 period. This suggests a run rate of $90.9 billion, slightly lower than the total issuance level of $96.4 billion recorded in 2007.

An interesting trend reversal was that small cap accounted for the greatest amount of new issuance in August with $878 million of new deals, or 38%, compared with $748 million of new deals for large cap, or 32%, and $690 million, or 30%, for mid cap. That compared with small cap taking the smallest amount of the pie for the year to date with 22%, and mid cap taking a close 23%, while large cap accounted for the lion's share of new issuance with 55% for the year to date.

Energy, financials lead August

By sectors, energy and financials were neck and neck for new issuance in August, compared with financials alone accounting for 65% of new issuance for the year to date.

Energy for the year to date accounted for only 6.7% of new issuance, but the single August energy deal - Massey Energy Co.'s $690 million of convertibles - accounted for 30% of the month's new issuance.

Only one deal exceeded Massey's in size and that was Boston Properties, Inc.'s $748 million deal. RadioShack Corp. - which falls in the consumer discretionary category - priced the third-largest deal with $375 million.

All the deals for August were cash-pay senior notes, the Lehman data showed.

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