Capital Markets

A Sunny Quarter for Convertibles

Volume of the securities soared 22 percent to highest level in five years, thanks to big financial-services offerings. But changes are in store.
Stephen TaubJune 30, 2008

Nothing like a bunch of crumbling financial giants to revive the convertible bond market.

U.S. companies sold about $36.2 billion of convertible securities in the second quarter, the most in five years, according to Thomson Reuters. This was up 22 percent from $29.7 billion a year earlier, according to the wire service.

For the first half of the year, however, convertible issuance actually fell slightly, to $53 billion from $55 billion a year ago. Still, the average size of deals this year swelled to $713 million from $459 million, thanks to the rash of large deals brought to market by banks and brokerage firms, which found themselves in a cash crunch due to massive write-offs from the subprime mortgage crisis.

So far this year, for example, Bank of America Corp. raised $6.9 billion; American International Group $5.9 billion; and Wachovia $4 billion through convertible paper issuance, while Lehman brought two large deals: for $4 billion in April and $2 billion in June, according to Thomson Reuters.

Still, as has reported in recent weeks, convertible-securities accounting is in for a change, as the Financial Accounting Standards Board considers a revision. And, according to a study by the Financial Analysis Lab at the Georgia Tech School of Management, the changes floated so far by FASB’s staff suggest that there could be a substantial impact on companies with preferred stock.