Salomon: Tech, telecom issues take toll on convertible performance

By Ronda Fears

Nashville, Tenn., March 4 - Because of the heavy presence of tech and telecom issues in the convertible universe, those sectors' weakness put strong negative pressure on convertibles in February. Salomon Smith Barney's convertible index was off 2.4% for the month, and it was largely due to the tech and telecom sectors, although the underlying stocks were much worse at a 7.1% decline.

"Due to the heavy sector weightings of the telecom and technology groups, persistent weakness related to questionable earnings quality and suspect credit statistics continues to put strong negative pressure on the asset class. Continued concerns centered on earnings visibility and credit worthiness have taken its toll on the technology and telecom industry groups," said Salomon convertible analyst Adrian Miller in a report Monday.

Yet, Miller added: "With another negative month in the books, convertibles continue to hold their own. Due to the influence of the technology group, convertibles slighted underperformed the broad equity market, yet outpaced the Blend Portfolio," which was down 3.93% for the month.

February saw convertibles post a decline of 2.4% in market weighted return while their underlying stocks fell a more dramatic 7.1%, Miller said, while the S&P 500 was down 1.9%, the Russell 2000 lost 2.9% and the Nasdaq fell 10.5%.

"On an equal weighted geometric basis, convertibles actually posted slightly worse results (-2.5%), as the convertible market constituents, as a group, were down a bite more then the weighted numbers would imply," the analyst said in the report.

"As has been the case, the more defensive oriented zero-coupon convertible bonds was the best performing group. Due to the exceptional weakness in the non-IG dominated technology and telecom sectors, IG convertibles outperformed during the month. As a result of many distressed tech and telecom companies being in the mid-cap category, (with an equity market cap between $1 billion and $10 billion), the Mid-cap convertible class was by far the worst performing group."

Zero-coupon convertibles were off 0.7%, continuing to show superiority over other convertible structures in the current negative environment, as mandatories were down 3.8%, convertible preferreds lost 3.2% and cash-coupon converts dropped 3.2%.

Despite the continued negative performance, Miller said the active new issue calendar has allowed the convertible market to sustain a pace of organic growth. The report showed the convertible market at $226 billion at the end of February, up from $215.5 billion at the end of December.

As converts sank in February, weighted average yields and conversion premiums inched higher. February closed with convertibles possessing a weighted average premium of 52.1% and a yield of 5.6%. As the weighted average price and delta sank further, the percent of the convertible market considered equity sensitive decreased as well. As of Feb. 28, the report said, 27% of the market is considered equity sensitive, off 2% from a month before.

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