Convertible Bond Sales on Torrid Pace
U.S. companies issued a record $60.2 billion of convertible bonds in the first seven months of 2001, beating the total for all of last year and putting sales on track for about $80 billion by year’s end.
“This is the cheapest source of financing for a lot of companies,” said Venu Krishna, vice president and convertible bond analyst at Salomon Smith Barney, which ranks among the top three underwriters of such bonds this year, according to Bloomberg Data.
Krishna predicts sales for the year of $70 billion to $80 billion, as the pace cools to about $3 billion a month, on average, for the remainder of the year. Sales in July were down to $5.34 billion, compared with $19.6 billion in May--the biggest month ever.
Convertible bonds, as the name implies, are exchangeable for shares in the issuing company at a preset price.
Thus, if a company’s shares rise, its convertible bonds also perform well. If the shares fall, investors’ losses are cushioned by interest payments on the bonds and the promise that the securities will be repaid at maturity.
The $200-billion convertible bond market has broken issuance records since at least 1999, according to Bloomberg data. The $40 billion or so sold in 1999, a record at the time, was surpassed by the 2000 total, which in turn was overtaken Tuesday.
Companies continue to line up to sell convertible issues. Telephone-equipment maker Lucent Technologies Inc. and Sprint PCS, the wireless unit of Sprint Corp., each plan $1 billion in convertible sales soon.
“There are still plenty of companies readying sales,” said Catharina Kusuma, a director in U.S. convertible research at UBS Warburg LLC. Part of the appeal of the market “is that it’s so versatile. It’s driven by innovation.”
Selling convertibles instead of regular bonds results in lower interest costs, in exchange for eventually giving up some equity. The potential for big gains in an issuer’s shares allows some companies with low credit ratings to raise funds when they would be otherwise shut out of capital markets.
