Convertibles Heat up

May 18, 2001 ( - The US convertible bond market is sizzling. Overall issuance in this market reached $14.5 billion, a new monthly record, after Merrill Lynch & Co. announced its sale of $2.04 billion in 30-year zero coupon convertible bonds.

The brokerage, which underwrote its own sale, originally planned on making a $750 million sale, but this increased by 173% after $6 billion in bids streamed in for the convertibles, which are bonds that can be converted into company stock at the owner?s request.

The previous record for issuance was $11.9 billion, set in February, and year to date, companies have sold $43.5 billion in these instruments, almost 75% of what was sold in the whole of last year, thanks to:

  • the Merrill Lynch sale, the third-largest convertible sale this year;
  • last week’s sale of $3 billion in Verizon Communications Inc. convertibles; and
  • February’s sale of $2.25 billion by conglomerate Tyco International Ltd.

For the second straight year convertible securities have outsold junk bonds in US markets due to their increasing popularity as a tax-efficient way for companies to raise cash at a low cost.

According to Morningstar, there has been steady growth in the number of mutual funds that invest in these assets and that investment by hedge funds accounts for much of the current activity in the asset class.