Glenn, to be or not to be a Amzn junk bond holder...that is the question?
Amzn currently has a market cap of just under $6bil.
In the event of a default the junk bond holders get to seize control of the company for their original cost.
The common stock shareholders as usual get left holding an empty bag.
>NEW YORK, Dec 22 (Reuters) - After a record-setting year of big highs and agonizing lows that in the end left many investors in the red, convertible bonds are poised in 2001 for fewer fireworks and modest positive returns, analysts said.
"This was a year when a lot of people got burned," said Nick Calamos," director of research for Calamos Asset Management Inc., which handles $6 billion, mostly in convertibles. "They key is to have a long-term focus."
Convertible bonds are hybrid securities that have characteristics of bonds and stocks. They offer current income and can be converted into company stock. Their fortunes are often closely tied to their underlying stocks.
Some investors consider them a safer way to invest in companies with volatile stocks. Convertibles often gain less than stocks when prices rise, and lose less when they fall.
That's what happened in 2000. In the first quarter, as the Nasdaq soared above 5000, convertible bond mutual funds rocketed higher by 9.79 percent, including interest and capital gains, according to fund information service Morningstar Inc.
But with the Nasdaq now more than 50 percent off its high, convertible funds lost their sheen. Through Wednesday, they are down 4.18 percent this year, Morningstar said. Just 18 of the 134 convertible bond funds Morningstar tracks -- some of which have multiple share classes -- are in the plus column.
Calamos, whose firm runs four of the 18, said investors should hold on tight.
"Valuations are starting to make sense again," he said. "One-third of the convertible market is at least 5 percent undervalued."
FROM EUPHORIA TO "THE BIG OUCH"
Convertible bond issuance in 2000 surged 41 percent from 1999's record levels. This year's $57.8 billion of sales came from 141 issues, according to Bear Stearns & Co. That compares with $40.9 billion from 110 issues in 1999.
The record issuance masks a year of extremes.
From January to March, as the Nasdaq soared, investors couldn't buy enough of the most volatile convertible bonds from cash flow-challenged companies with ambitious growth plans, especially biotechnology and telecommunications companies.
Internet retailer Amazon.com Inc. (NASDAQ:AMZN), for example, was among the 66 companies that sold a record $24.1 billion of convertible bonds in the first quarter, Bear Stearns said.
"We started getting publicity as an alternative to equities," said John Everhart, a senior analyst who buys convertibles for the $4 billion AXP Bond Fund.
Then in the spring, the Nasdaq fell 38 percent, and convertible bond investors and "New Economy" companies crept away. Investors demanded less risky bonds, and they got them.
Filling the gap were "safer" companies, especially in the energy services sector, selling higher-quality bonds with less generous terms. Many were "zero-coupon" bonds that make no regular interest payments at all.
Meanwhile, Amazon.com's bonds fell in June after Lehman Brothers Inc. analyst Ravi Suria labeled its credit "extremely weak and deteriorating." Amazon.com shares have fallen 80 percent since the February sale, and the company probably couldn't sell bonds now if it wanted to.
By early fall, the market appeared to gain an equilibrium, absorbing a steady blend of higher and lower quality bonds. Conglomerate Tyco International Ltd. (NYSE:TYC) sold $3 billion in the year's largest sale, while fiber-optic maker Corning Inc. (NYSE:GLW) sold $2 billion.
But then the Nasdaq collapsed yet again, and the bottom fell out for many convertible bonds, especially in the telecommunications sector.
In what Lehman called "The Big Ouch," telecom convertibles fell 20.5 percent in November alone. That was their worst monthly performance since Lehman began tracking them 12 years ago.
"A lot of that resulted from the high leverage and big expectations for revenue growth, which often didn't pan out," said Everhart.
THE FUTURE
In 2001, experts expect convertible bonds to perform better. The bonds are arcane, however, so individual investors should continue to tread with care, they said.
After all, they said, energy services, telecom and other capital-intensive companies will still need to raise money, but not all can expect a welcome reception from financial markets.
In the equity markets, with stock prices down, companies may be unable to raise enough cash by selling shares.
And in the bank loan and bond markets -- especially the junk bond market, where defaults are expected to soar next year to their highest since the 1991 recession -- wary lenders often won't extend credit at all. They are now choosier, insisting on better protection and less disappointment.
Lehman sees lower-rated telecommunications companies facing more pain ahead, at least until the sector restructures. It might take three years for debt levels to fall and for some of the weaker credits to default, Lehman said.
"There is not an appetite for companies with distressed balance sheets," said Calamos.
Yet Calamos added that investors may still want to take on more risk.
"What worked this year was higher quality, lower-risk sectors, and I expect next year to be a reverse," he said.
Indeed, though it's hardly certain, the convertible bond market could be a beneficiary of tight markets elsewhere.
"Companies need capital," said Everhart. "They may not be able to turn to the equity market, and the bond market should remain tough, so convertibles will often serve as the more popular choice." |
