Convertible Junction

After two years of wrenching losses that drove both investors and issuers away, the convertible bond market is staging a comeback. So far this year corporations have issued $18.3 billion of the hybrid securities, which are bonds that can be converted into equity if a company's share price rises to a preset level. This year's volume is more than double the $8.9 billion raised at this point in 2005, according to Dealogic.

The environment for new issues began to improve in November as a few bargain-hunting investors nibbled at beaten-down convertibles in the secondary market. Steadily rising interest rates helped because convertibles, owing to their equity component, typically pay lower interest than ordinary bonds. A healthy stock market also provided a boost. Companies are less likely to issue what is basically an interest-paying equity option when stocks are weak.

科胜讯系统股票价格是一个因素,which sold $200 million of 20-year convertibles in March. The semiconductor maker first considered the deal last fall, but its shares were trading below $2 apiece following several bumpy acquisitions. Rather than float bonds with a conversion price of as little as $2.60 per share -- essentially, selling cheap equity -- Conexant waited for its stock to rebound. The securities it issued in March, when its shares had risen to $3.19, carried a 4 percent coupon and a $4.92 conversion price.

"We wanted to be as cash-efficient and nondilutive as possible," says investor relations chief Bruce Thomas. "A $2.60 conversion price was too rich for our blood."

Companies are tapping the market for several reasons. Conexant used proceeds from its deal to retire higher-interest debt. Others, including money manager Affiliated Managers Group and biotechnology concerns Amgen and Gilead Sciences, have sold convertibles to fund share buybacks. And some are using the market to finance acquisitions. Specialty pharmaceuticals maker Allergan sold $1.6 billion of convertibles last month to back its $3.2 billion purchase of Inamed Corp.

"The convertible market has been an attractive place to raise capital to finance mergers and acquisitions," says Fred Fiddle, head of equity-linked capital markets for Merrill Lynch & Co. "I'm confident we will see more going forward."

Today's steady clip of new offerings seemed unlikely as recently as last summer, when plummeting prices in the secondary market sent investors fleeing. That dislocation had its origins in 2003 and 2004, when hedge funds piled into convertible arbitrage, a strategy that involves buying a company's convertible bonds and selling its stock short to lock in profits whether the share price rises or falls.

Money allocated to convert-arb funds grew from $25 billion in December 2002 to $45.2 billion in March 2004, according to Tremont Capital Management. But the supply of new issues didn't meet demand, especially as low rates encouraged companies to sell straight debt. Funds thus bid up the prices of existing convertibles, eating into returns. Investors soon yanked money from convert-arb funds, triggering sales of convertibles during early 2005 that sent prices tumbling.

Then last May ratings agencies downgraded General Motors Corp.'s debt just as billionaire investor Kirk Kerkorian made a run on its stock. That squeezed traders who owned GM's convertibles and had shorted its shares. The Lehman Brothers convertibles index plunged 4.8 percent in the first five months of 2005 and finished the year up just 2 percent, versus 9.6 percent in 2004. Money in convert-arb funds had dwindled to $26.8 billion by the end of September. Some funds, like $2 billion Marin Capital Partners, shut down entirely. With few buyers remaining, issuance fell to $38.7 billion in 2005, down from $47.6 billion in 2004 and $88.3 billion in 2003, according to Lehman.

"Calling 2005 challenging would be an understatement," says Lehman convertible research chief Venu Krishna. "We saw a massive sell-off in the convert market that was unprecedented in scale."

Now hedge funds and other investors are slowly returning. Nearly 40 percent of last year's new issues came in November and December, when bottom-feeders emerged and the market began to stabilize. In this year's first quarter, the Lehman index climbed 5.5 percent. Krishna predicts that issuance will reach $45 billion to $50 billion this year, but is quick to add that buyers are treading carefully. "The correction was very severe," he says. "Investors don't seem to be in a hurry to get back to the convertible arbitrage business."

Deathbed conversions
尽管去年几乎毫无生气,转换ibles market is enjoying a resurgence, as shown by the following big offerings in recent months.
Company	Date	Amount
Gilead Sciences	20-Apr	1.2 billion
Medtronic	18-Apr	4.4 billion
Allergan	12-Apr	1.6 billion
Boston Properties	31-Mar	400 million
King Pharmaceuticals	24-Mar	400 million
Time Warner Telecom	24-Mar	374 million
HealthSouth Corp.	1-Mar	400 million
Teva Pharmaceutical Industries	24-Feb	1.4 billion
Amgen	14-Feb	5 billion
United Auto Group	1-Feb	375 million
Source: Company filings.