Technology convertibles provide safe haven as market wobbles

By Evan Weinberger

New York, Aug. 22 - In a market beset by worry over subprime loans and credit crunches - recent upswing aside - convertibles linked to technology companies have become a safe haven for investors, according to market watchers.

"Everybody likes technology," said one portfolio manager. The portfolio manager and others cited the constant need for upgrades, regardless of outside economic conditions in many cases, and relatively long-term contracts that technology firms have with their clients as reasons for the attraction.

"I think the view is that technology has been holding up in this market," a sellside analyst said. "Some people would even go so far as to say it's recession resistant."

With corporations for the most part maintaining a constant budget for technology upgrades, the sector does provide some cover should consumer spending and credit woes strike at the economy in the coming days.

Companies, the analyst said, will always need the latest technology.

"As much as companies are relatively cash rich, they should be able to [upgrade] and it should be less affected by consumer spending and credit," a sellside analyst said.

Intel, Linear popular

Several technology convertibles, like Intel Corp.'s 2.95% junior subordinated convertible notes due Dec. 15, 2035, have traded consistently while other market sectors floundered in recent days. Intel is a Santa Clara, Calif.-based semiconductor chip producer.

Another popular name among traders, analysts and portfolio managers is both tranches of Linear Technology Corp.'s convertible senior notes due May 1, 2027. The series A notes carry a 3% coupon and the series B convertibles carry a 3.125% coupon. Linear Technology is a producer of linear integrated circuits based in Milpitas, Calif.

Immediately when people hear "tech convertibles," their thoughts might wander to the tech bubble of the late 1990s and early 2000s, where people spoke about new business paradigms and models for internet companies without looking whether those companies made a profit. But choosing the right technology companies, then and now, could provide long-term profits.

"The tech hardware companies pretty much [survived,]" one sellside analyst said. "Valuations suffered when the internet bubble burst, but the companies that aren't around now were pretty much internet-related."

Eyeing earnings

The key, as with any investing, is looking at a company's fundamentals. While the Intel and Linear convertibles have consistently traded above par, convertibles issued by Advanced Micro Devices Inc. have consistently traded down. The Sunnyvale, Calif.-based semiconductor producer's 6% convertible senior notes due May 1, 2015 closed Tuesday at 82.88 versus a closing stock price of $12.17.

"Intel and [Linear Technology] are safe as they have strong balance sheets and free cash flow and trade at reasonable multiples," another portfolio manager said. "[Advanced Micro Devices] is anything but safe in our opinion as it burns cash and has a weak balance sheet. The success of their new chip is extremely important for them."

Other tech convertibles mentioned by analysts and portfolio managers as worth a look include Xilinx Inc.'s 3.125% junior subordinated debentures due March 15, 2037 and convertibles issued by Cadence Design Systems Inc. Cadence currently has three outstanding convertibles, zero-coupon convertible senior notes due Aug. 15, 2023 and two tranches of convertible senior notes, a 1.5% tranche due Dec. 15, 2013 and a 1.375% tranche due Dec. 15, 2011. Xilinx is a San Jose, Calif.-based semiconductor producer. Cadence is a San Jose, Calif.-based design software and hardware developer.

Less dependent on U.S.

A portfolio manager added that many technology convertibles provide investors with global exposure, which provides protection should the United States economy stumble.

"If the U.S. economy goes into a recession, you want to have some coverage," he said.

When looking at technology convertibles, investors should be wary of telecom infrastructure companies, like Time Warner Telecom Inc.'s 2.375% convertible senior notes due April 1, 2026. Many of the internet-related technology convertibles come from companies that aren't too heavily leveraged, the portfolio manager said, and often are using the proceeds to buy back stock. The telecommunication infrastructure companies have higher debt levels.

"The lending is more at risk," the portfolio manager said.

Even though every investment comes with some risk, technology convertibles do provide some cover while subprime mortgages and credit worries continue to lurk in the background, market players agreed.

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