Salomon convertible index down 3.2% in September, down 7.7% in Q3

By Ronda Fears

Nashville, Tenn., Oct. 4 - The Salomon Smith Barney convertible index declined 3.2% in September and 7.7% in third quarter.

"With the September decline of 3.2% the convertible market seems dreary, however it is by no means one of the worst monthly returns," said Salomon convertible analyst Adrian Miller in a recent report.

"In fact, by comparison, convertibles as an asset class continue to best all equity indexes. Convertibles posted the best monthly return among the non-Treasury securities. Obviously, convertibles were a beneficiary of its low delta and relatively close proximity to its investment value."

For September, he noted the S&P 500, Nasdaq and Wilshire 5000 posted losses of 10.9%, 10.9% and 10.2%, respectively.

While the high-yield market continues to feel the pain of widening spreads - Salomon's high-yield bond index lost 2.0% - Treasuries and high-grade corporate bonds continue to be the safe haven of choice for many investors seeking shelter from the storm. The Salomon investment-grade bond index was up 1.6% and the firm's 10-year Treasury benchmark index gained 4.7%.

"While the monthly loss is not in the top tier of historic monthly losses, convert's third quarter loss of 7.7% ranks fourth in total quarterly losses since the inception of our index (December 1991)," Miller noted.

The only three quarters to post larger losses, he said, were fourth quarter 2000 with an 11.6% decline, third quarter 1998 with an 11.3% decline and third quarter 2001 with an 8.6% decline.

With converts continuing to outpace their underlying stocks by large margins, Miller said conversion premiums and market deltas once again pushed out and fell, respectively.

As of September, the convertible market's weighted average premium to conversion value climbed to 87.9% from 79.9% in August. The weighted average delta on cash-pay convertibles fell to 41.6% from 46.7%. The weighted average delta on the market as a whole is 36.1% down from August's 41.4%.

The convertible market weighed in with an average yield of 6.7% up from 6.3% in August. Not surprisingly, break-even years pushed out dramatically to 12.3 from 10.6 while the average years of remaining call protection stayed stationary at 2.7 years.

"The profile of the convertible market relative to its sensitivity profile continues to sag," Miller said.

"With premiums pushing out and deltas falling the percentage of the market considered equity sensitive is now at 20.6%, down from 22.2%."

Issues considered average in terms of delta, or the typical convertible, is at 15.7%, versus 19.7% previously, while those issues consider busted has increased to 63.6% from 58.2% in August.

Also, with the tremendous strength in the Treasury market and the modest fall of issues in the convertible market, premiums to investment value fell to 23.0% from 26.6% in August.

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