infopros --
The evidence is circumstantial but it is very persuasive, and I am
willing to bet that the reason that there is a sudden decline in new
corporate convertible bonds is an action taken this month by the
Federal Accounting Standards Board (FASB).
What has the FASB done? Here is the deceptively simple announcement
of its new proceeding, which was announced earlier in the month:
"July 19, 2004
This draft abstract for EITF Issue No. 04-8, "The Effect of
Contingently Convertible Debt on Diluted Earnings per Share,"
addresses the issue of when the dilutive effect of contingently
convertible debt instruments (Co-Cos) should be included in diluted
earnings per share.
The draft abstract reflects the Task Force?s tentative conclusion
reached at the June 30?July 1, 2004 EITF meeting that Co-Cos should be
included in diluted earnings per share computations regardless of
whether the market price trigger has been met."
FASB: Draft Abstract: Convertible Bonds
http://www.fasb.org/eitf/0408_draft_abstract.pdf
You can read the full text of the due proposed accounting standard at
the above link. (It is a PDF file, so you will need Adobe Reader to
access it. In the unlikely event that this tool is not installed on
your computer, it can be downloaded free from here:
Adobe Reader
http://www.adobe.com/products/acrobat/readstep2.html )
Why is this action scaring potential convertible issuers? Most of the
information available now is from press articles available only on a
subscription basis, so I cannot post them in their entirety here, but
I can give you enough information from the most informative of them
(along with complete citations) to make my case.
The best treatment of the issue that I have found is in a July 8 Wall
Street Journal article entitled "Possible Accounting Change May Hurt
Convertible Bonds." Here is its lead paragraph:
"Wall Street is going cuckoo over CoCo bonds. The strangely named
securities have been a boon for big Wall Street firms over the past
three years. But a potential accounting-rule change could make the
securities much less attractive for corporate issuers, while also
taking a bite out of the earnings of some major companies, including
General Motors Corp., Merrill Lynch & Co. and Omnicom Group Inc."
Source: Wall Street Journal, by Aaron Luchetti, page C1
The article goes on to say that the "CoCo", or "contingent
convertible" bonds have accounted for 84% of all new corporate
convertible that have been issued this year. They are convertible
only after a stock price has risen by a given, substantial, amount
and, unlike regular convertible bonds, do not immediately count as
"diluted shares." Rather, they count as part of the diluted shares
total only after their "trigger" price has been reached. Because of
this feature, a company's reported earnings per share is not
immediately diluted (i.e., reduced) as a result of the CoCo's
issuance. But the FASB wants to eliminate that advantage.
According to the above article:
"The possible change . . . . may force the previously hot area of
convertible-bond issuance to dry up, at least for awhile. Companies
considering these convertible deals "will wait and see" what the
changes are before following through, predicts Craig Farr, co-head of
U.S. equity capital markets at Citigroup."
I commend the full article to your attention. If you or a colleague
subscribe to Wall Street Journal Online, it is available at the
paper's Web site, or it can be puchased by non-subscribers for $2.95
from the Factiva service that is available at the Journal's website,
here:
Wall Street Journal: Search
http://online.wsj.com/advanced_search
There is a more recent article in the Journal that contains much of
the same information that was published yesterday and may be available
to non-subscribers to its online service. I can't test that
proposition because I am a subscriber, but you might give it a try.
The somewhat shorter article is entitled "CoCos May Lose Their
Advantage," by Lingling Wei and Aaron Lechetti, and is from the July
19 edition of the paper. In any case, it will probably be easy for
you to come up with a hard copy of that edition.
Additional Information:
Here is one free site that contains the definition of CoCos and refers
to the fact that the current FASB proceeding will remove their
advantage:
Investopedia: Contingent Convertibles
http://www.investopedia.com/terms/c/contingentconvertible.asp
Search Strategy:
I went right to the Wall Street Journal's website and, with the
benefit of my Factiva subscription, conducted various keyword searches
until I came with the articles cited above.
It seems to be virtually certain that the FASB's action is causing
what is at least a temporary wait-and-see pause in convertible bond
issuance.
If anything is unclear, please ask for clarification before rating the answer.
markj-ga |
