Citigroup: Convertible returns year to date up 6.7% versus 0.5% gain for convert arbs

By Ronda Fears

Nashville, Dec. 2 - Citigroup Global Markets Inc. convertible analyst Adrian Miller noted in a report Thursday that while the strong boost in stocks for November aided outright convertible returns, the convertible arbitrage continued to flag, although showing its best month since summer.

"After many months of uneven returns across capitalization tiers, equities displayed an impressive bounce during November," Miller said in the report. "And despite weakness in high-grade bonds, convertibles benefited handsomely due to the equity market's advance."

For the month, the Citigroup convertible index posted a cap-weighted gain of 3.6%, while the underlying stocks increased 6.9%. By comparison, the S&P 500 was up 4% and the Russell 2000 rose 8.6%.

Year to date through Nov. 30, the Citigroup convertible index was up 6.7% on a 10% rise in the underlying stocks.

Bond market unfriendly

"For the first time in many months, the bond market was not the most friendly companion of convertibles," Miller noted.

While high-yield bonds were up 1.2% for the month, benefiting from a 56 basis point decline in spreads, he said higher Treasury beta high-grade bonds fell 0.8% as the 10-year Treasury sold off 2.3% during the month.

Year to date, he reported high-yield bonds were up 9% versus a 3.5% increase for high-grade bonds.

Weak volatility hurt arbs

As volatility continued to soften, Miller said convertible arbitrage results probably posted their best monthly results since July.

While some hedge funds set up on the Charter Communications Inc. 5.75% due 2005 convertible bond going into the St. Louis cable company's new 5.875% convertible rejoiced at the multi-point pop, early indications show overall returns in the strategy were up just 0.5% for November.

For the year through the end of November, returns in the convertible arb strategy remained muted at about a gain of 0.5%, compared with the overall convertible market's year-to-date gain of 6.7%.

Mandatories outshine bonds

While all security types within the convertible market did well, the analyst noted that high delta mandatory preferreds posted the best returns for November with a 5.6% increase.

Comparatively, cash coupon convertible bonds rose just 3.82% and zero-coupon issues edged up 1.35% for the month.

Year to date, the same was true with mandatories posting a 12% gain to 6.3% for cash paying convertibles and just 6% for zeros.

Mandatory converts presently make up 11.3% of the entire market, according to Citigroup data.

Market growth stagnant

"Despite impressive performance results, large outflows tied to maturities and redemptions, coupled with anemic new issue proceeds, have led to the market's overall growth to remain stagnant," Miller said in the report.

Citigroup shows a convertible market value of $286.8 billion, off from $299.4 billion in December 2003.

Top 10 performing issues

Among the best performing convertibles Sirius Satellite Radio Inc.'s older issue, the 3.5% due 2008, was at the top of Citigroup's list for both November and year to date with a 102% gain for 2004 and a nearly 65% boost for the month.

The remaining top 10 on the Citigroup list, in order of performance for the year through Nov. 30, were the TXU Corp. 8.75% due 2005, Lions Gate Entertainment 4.875% due 2010, Sierra Health Services 2.25% due 2023, Valero Energy 2% due 2006, Wynn Resorts 6% due 2015, Teekay Shipping 7.25% due 2006, TXU 8.125% due 2006, Millennium Chemicals 4% due 2023 and TXU floater due 2033.

Bottom 10 performing issues

As for the worst performance, Tower Automotive Inc.'s 6.75% convertible preferred due 2018 took the prize with a year-to-date drop of 52%. For the month, the worst performance was marked by the Pegasus Communications Corp. perpetual 6.5% convertible preferred with a 25% decline.

The remaining bottom 10 on the Citigroup list, in order of performance for the year through Nov. 30, were the Primus Telecommunications 3.75% due 2010, America West Airlines cash-to-zero due 2023, Pegasus 6.5% perpetual, UTStarcom 0.875% due 2008, Mesa Air Group cash-to-zero due 2023, Cypress Semiconductor 1.25% due 2008, Maxtor Corp. 6.8% due 2010, Allied Waste 3.125% due 2006 and Level 3 Communications 2.875% due 2010.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.