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Strategies & Market Trends : Heinz Blasnik- Views You Can Use -- Ignore unavailable to you. Want to Upgrade?

To: LLCF who wrote (2602)	6/24/2003 10:46:28 AM
From: Perspective	Read Replies (4) \| Respond to of 4907

Two of the biggest market distortions I see out there right now are due to convertible bond issuance and interest rate swaps. The swaps look like little more than a clever way for the corporate financial wizards to circumvent regulation by the credit rating companies. The regulators look at a company with a bunch of long-term debt swapped to the short end and probably don't see the problem. Either that or they don't have to show the swap on the balance sheet. I know the debt rating companies have trouble with large volumes of short-term debt, but I think it's due to fears that the debt might not be rolled over smoothly one quarter. Regardless, it understates the true carrying cost of a long-term investment made from debt issuance. Once (if?) short-term rates rise, these companies will face crippling debt loads. Of course, they are counting on an accomodative Fed forever. If inflation really does heat up, they will be completely crushed. Convertible bonds are even worse, though. You've got little runt companies issuing debt with rates better than the US government, all because they have a lottery ticket attached to them. People buying them are fools; to accept all that default risk in exchange for a lottery ticket is just dumb. It remains a market inefficiency that I don't fully understand, and I haven't figured out how to fade it yet. The most logical thing to do would be to short a convertible bond and buy a treasury with the proceeds, swapping the treasury coupon to pay the convertible coupon, and just waiting for the inevitable defaults. All I can figure is that the convertibles get done because they are a silent dilution of shareholders, much like insider options. They don't dilute immediately, only down the road. BC