Citi says replace $15 billion of maturing converts with AngloGold, Boston Properties, among others

By Rebecca Melvin

New York, Jan. 25 - Nine large convertible bonds with more than $15 billion outstanding that mature or are likely to be put back in 2011 should be replaced with issues that for the most part are smaller, but still among the larger issues in the convert universe, with good credit quality, according to Citigroup's U.S. convertibles sales and trading team.

Citi's list of proposed suitable replacements includes AngloGold Ashanti Ltd.'s $731.5 million of 3.5% convertibles that mature May 2014 and Boston Properties Inc.'s $750 million of 3.625% convertibles due February 2014.

Also on the substitution list are OAO Lukoil Oil Co.'s $1.5 billion of 2.625% convertibles due 2015, SL Green Realty Corp.'s $300 million of 3% convertibles due 2017, Xilinx Inc.'s $690 million of 3.125% convertibles due 2037 and ArcelorMittal's $800 million 5% convertibles due May 2014.

The issues were put forward to replace the $2.5 billion of Amgen Inc.'s 0.125% convertibles and $1.44 billion of PNC Corp.'s 4% convertibles that both go away Feb. 1, as well as Medtronic Inc.'s $2.2 billion 1.5% convertibles maturing April 15 and Gilead Sciences Inc.'s 0.5% convertibles maturing May 1, of which there is $650 million outstanding.

Nabors Industries Inc. will also see its 0.94% convertibles mature May 15. And June will bring the maturity of Archer Daniels Midland Co.'s 6.25% convertibles, of which there is $1.75 billion, and Symantec Corp.'s 0.75% convertibles, of which there is $1.1 billion.

Rounding out the list is EMC Corp.'s 1.75% convertibles that mature in December and Transocean Ltd.'s 1.5% convertibles which can be put back on Dec. 15.

That totals $15.138 billion, which represents about 6% of the total dollar amount going out of the U.S. convertible bond market in 2011, the Citi commentary noted.

While some B tranches make acceptable replacements for the departing A bonds, such as the EMC bonds of 2013 and the Transocean C series convertibles, Citigroup doesn't think that all the B paper looks worthwhile. For example, Amgen's 2013 convertibles offer minimal yield and little option value, Citi's convertibles team wrote in commentary published Monday.

At the time of issue, the departing converts were: short dated - many were five-year bonds issued in 2006 - with strong underlying credit support (all but two carry an investment-grade rating and the implied ratings of those bonds are both BBB), extremely liquid and offering some optionality.

"On the other side of the ledger are the small coupons that all of these [replacement] issues carry (the average coupon of the group is an even 1.5%, well below the average of just over 4% for the entire convert universe)," according to the Citi commentary.

"It looks like a decent list," a New York-based sellsider said of the Citi commentary. "Accounts like big, liquid names that can build up a size position. All those replacement names are liquid."

But one New York-based sellside trader noted that Amgen and PNC have had no sensitivity to the equity for quite a while; and the Intel Corp. 3.25% convertibles due 2039, which were also on the replacement list, are not a comparable "in any way except credit quality."

He noted that AngloGold currently trades around 120, making it a difficult comparison as well.

"The names going away are more readily described as convert money market funds," he said.

Transocean, though, "is more alike, regardless of the upheaval last year. They trade tight; they're liquid and they have little sensitivity to the equity," he said.

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