Converting converts. (Wall Street West).Long a meek hybrid among investment thoroughbreds, convertible bonds have become a lot more popular on Wall Street, as both investors and issuers look for ways to hedge themselves against the unknown. Convertible bonds are corporate IOUs that can be exchanged for stock under certain conditions. In 1995, only $17 billion of convertible bonds were issued by U.S. companies -- a number that grew steadily through the rest of the decade, but exploded to more than $100 billion last year. This year looks like it will break last year's all-time record, said Dave Johnson Dave Johnson may refer to:
The officer of a firm responsible for day-to-day management, usually the president or an executive vice-president. for Los Angeles-based Froley Revy Investment Co., a money manager that has specialized in convertible bonds for more than 25 years. For a generation, it was usually non-investment grade outfits issuing convertible bonds, offering high yields and the chance for an big upside "equity kicker Equity kicker Stock warrants issued attached to a new debt, preferred or common stock issue to improve the salability of the issue. equity kicker " to offset risk. But the big boys are now issuing them. By 2000, nearly 60 percent of convertible bonds were issued by investment-grade companies, according to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. Convertbond.com. Among the largest issuers of convertible bonds in 2001 were Verizon Communications
Verizon Communications, Inc. , Merrill Lynch Merrill Lynch & Co., Inc. (NYSE: MER TYO: 8675 ), through its subsidiaries and affiliates, provides capital markets services, investment banking and advisory services, wealth management, asset management, insurance, banking and related products and services on a global basis. , Tyco International and General Motors. Notably, Enron Corp. made the top 10 list with a $1.3 billion zero coupon bond Coupon Bond A debt obligation with coupons attached that represent semiannual interest payments. Notes: No record of the purchaser is kept by the issuer, and the purchaser's name is not printed on the certificate. This is also known as a bearer bond. in January of 2001, before the company gave new meaning to the term "zem coupon." Everyone is hedging their bets, explained Johnson. Issuers think they will be able to increase stock prices sometime in the next few years, when the bear market ends, If prices rise enough, lenders will convert their bonds into equity and -- poof! -- away goes the debt. On the other side, convertible bond buyers want some yield while they wait for that day, and if that day never comes, at least they got that yield while waiting. Additionally, said Johnson, there has been a huge increase in the number and size of hedge funds that buy convertible bonds and then short the underlying stock. If a stock goes down, they make money on the short position, while collecting interest on the bonds. If the stock rises, they make money on the convertible bonds (and interest), if taking a hit on the short position. if effectively executed, such a strategy should "stabilize" returns, Johnson said. In a big bull market, everyone wants stocks. In a sustained bear market, nobody does. But in a choppy market Choppy Market A stock market condition whereby prices swing up and down considerably but with no resulting overall price movement in either direction. Notes: The term is derived from the phrase choppy seas, where a boat will move a lot but not over any large distance as like today's, "we should continue to see a good amount of investor interest in convertibles," predicted Johnson. "They offer a defensive posture and yield." Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at sevencontinents@mindspring.com. |
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