Market Crash Put Convertible Bonds on Back Burner

By Caprino, Mariann | THE JOURNAL RECORD, November 21, 1987 | Go to article overview

Market Crash Put Convertible Bonds on Back Burner


Caprino, Mariann, THE JOURNAL RECORD


NEW YORK - This was destined to be another record year for convertible bonds, those hybrid issues that pay investors a fixed return while giving them the option of swaping for stock.

But the stock market's epic crash on Oct. 19 forced a number of companies to put their plans to issue convertibles on the back burner. According to Securities Data Corp. Inc., not a single, publicly underwritten convertible bond was issued in the five weeks following the market crash.

In the same period last year, 12 convertible issues were sold, raising a total of $542.2 million, the New York research firm said.

``New issues dried up completely,'' said John Calamos, president of Calamos Asset Management, Inc., an Oak Brook, Ill.-based money management firm that specializes in convertible debt.

Underwriters price issues in part by considering the value of the underlying stocks. With stock prices slashed in the market collapse, ``companies realized this was not a good time,'' Calamos said.

Stock prices have yet to stabilize, but to compensate for the instability, the interest rates on some convertible issues trading in the secondary market have turned up.

And some analysts say continued uncertainty in the equity market will lure investors anew to convertibles.

``Over history, they have played an important role in volatile markets,'' Calamos said.

Investors who buy convertible bonds are guaranteed the security of a fixed rate of return. Typically this rate has stood about 3 percentage points below the interest paid on a regular corporate issue. But since the market crash, that spread has fallen to about 1 1/2 percentage points.

According to Mark Hunt, a covertible bond analyst at Smith Barney, Harris, Upham & Co., the yields on many convertible bonds are ``very competitive.'' For example, he pointed to a convertible bond issued by Humana Inc. that has a current yield of 9.8 percent.

These bonds have an added kicker, too. Investors are entitled to swap the bond virtually at any time for a specified number of shares of the issuing company's stock.

Granted, stock prices don't look too good right now. Humana's issue is based on a conversion price of $37.80, Hunt said. The stock closed Thursday on the New York Stock Exchange at $21.50 a share.

But analysts say the higher yield on convertible issues are supposed to compensate until the market turns around. …

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