Zeros Reenter The Convert Fray

Santini, Laura
June 2003
Investment Dealers' Digest;6/23/2003, Vol. 69 Issue 25, p10
Trade Publication
Zero-coupon convertibles have joined the pack of convertible bond issues in the U.S., and not for energy companies, but for a healthcare and a technology company. Taking advantage of heavy demand from investors, Wall Street, New York City-based firms are trying to sell zero-coupon deals to issuers. And for those companies concerned about diluting their share price as a result of issuing convertibles, Wall Street is allowing them to use over-the-counter derivatives contracts to create a structure dubbed a call spread that essentially immunizes against the risk of dilution. Earlier this year, "there was a tremendous lack of supply in the convertibles market," said Sean Brady, head of equity-linked origination at Credit Suisse First Boston Corp., which has executed 10 such convertibles offerings in the past few months. Many companies that issued convertibles five years ago have experienced sharp declines in their share prices. The equity plunge has thrust these convertibles way out of the money, meaning investors won't be able to exchange bonds for equity shares until the stock price rebounds. Dilution causes some companies to hesitate. Many companies think their stock prices remain depressed and hesitate to offer convertibles at 15%-30% premiums.


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