Capital Markets

Convertibles Taking Back Seat to Equity

As stock-market results improve, issuers are shying away from convertible securities. But don't count these capital-raising vehicles out yet.
Stephen TaubNovember 30, 2004

Judging by recent activity, convertible securities are becoming passé among issuers, as many companies have all but overlooked this relatively low-cost form of financing in favor of equities.

Up through Thanksgiving, there were only 189 convertible underwritings in the United States, compared with 297 through the same period last year, reported the Wall Street Journal, which cited data from Dealogic LLC. Further, companies raised $44.02 billion from convertibles this year, less than half the $93.32 billion taken in at this point in 2003. (Convertibles are corporate bonds or preferred stock that can be traded in for common stock at a pre-set price.)

Nevertheless, don’t expect convertibles to become an endangered species. The Journal also reported a small uptick in convertible issuance of late, citing deals from Inc. and Charter Communications Inc. earlier this month.

The convertibles slowdown, however, is surprising given that equity offerings — both initial sales and follow-on sales — have staged a 2004 comeback. Indeed, convertibles, which are traditionally favored by smaller, faster-growing companies, have roughly tracked the fortunes of equity underwritings. “It’s not a lockstep pattern, but generally, when IPOs are up, so are convertibles,” Jay Ritter, a professor of finance at the University of Florida in Gainesville, told the paper.

So far this year, 225 U.S. common-stock initial public offerings have raised $76.5 billion, according to Dealogic. Last year, 60 IPOs, which raised $10.19 billion.

The market for secondary and follow-on stock sales has also been strong this year, rising to 523 from 456 compared to last year, noted the Journal. Stock sales amounted to $84.03 billion in 2004, up from $66.5 billion a year ago.

That’s a far cry from a few years ago, when the IPO market all but dried up and the convertible market found momentum. In fact, in 2001 and 2002 companies like Travelers Property Casualty Corp. and Prudential Financial Inc. added convertible securities to their equity offerings based on strong demand, according to the paper.

At the time, with the market for large-cap equities collapsing, investors liked convertibles because the income component of the securities served as a type of hedge.

But, fair-weather investors are preferring straight-up equity now that the stock market has come back, even though returns have not accelerated in a straight upward climb over the past 12 months.