Alívio do IRS é maior para 17% das famílias

[Info]

O Kaegi diz que andam aí muitas ofertas de obrigações convertíveis em ações (por cá também apareceram umas tantas).. e que isso é sinal que os CEO consideram as suas empresas sobrevalorizadas.... é ler e concordar ou não.

Cump.


One Sign the Market Is Overvalued
Wednesday September 17, 7:00 am ET
By Fritz Kaegi Morningstar.com

Imagine this scenario: Your bank offers you a substantially lower mortgage rate if you agree to sign over any raises you get at work over the next five years. Would you do it? If you're pretty sure you'll be getting a big raise next year, you probably won't go for this deal. On the other hand, if the odds are high that your salary won't be rising anytime soon, you'll jump at your mortgage lender's offer. After all, you know more about your future employment situation than he does, and his offer is a perfectly legal opportunity for you to take advantage of him.

The same advantage holds true for companies that issue convertible debt. If you're the CEO of an overvalued company, taking investors up on an offer for a lower interest rate in exchange for a claim on your company's stock price appreciation is the logical thing to do. And in 2003, more than any year in recent history, these types of deals have mushroomed.


How Convertible Bonds Work

Convertible bonds are just plain-vanilla debt, plus an option to buy the firm's stock at a certain fixed price in the future. If the stock rises above a predetermined price before the bonds mature, the bonds can be converted from debt into shares of the company. Thus, investors have an "option," and because an option has monetary value, a company issuing a convertible bond will be able to pay a lower interest rate than if it had issued debt without the option attached.

Convertibles have plenty of uses. Firms in financial distress can get financing at a lower interest rate. Convertible bonds can be a kind of back-door secondary stock offering when conditions in the equity market are poor and investors won't go for a regular stock offering. Converts can be especially useful for growth companies, which are willing to give bond investors some of the equity upside in exchange for cheaper and more flexible financing. Convertibles helped fuel Silicon Valley companies' growth in the 1990s, for example.

One other notable reason to issue convertibles is that they allow firms to benefit from investor optimism by selling call options on their own stock. That's essentially what happens when a firm issues convertible bonds.

Companies have raised roughly $80 billion through more than 200 convertible bond issuances so far in 2003. That's on track to more than double the amount raised in such offerings in 2002. So why are companies doing it?


Data and Examples

In most cases, we suspect companies are taking advantage of both overpriced equity and excessive optimism about their future prospects. One reason is that the most overpriced names (based on the current market premium relative to Morningstar's estimates of fair value) on many of our analysts' coverage lists are the most likely to be participating in the convertible bonanza. Although only about 7% of the companies we cover have issued convertibles since December 2002, at least one of the top two most overvalued companies has done so in the telecom-equipment, pharmaceuticals, biotech, oil and gas, software, advertising, transportation, and health-services sectors, respectively.

Looking into the matter further, we found that companies that have issued convertibles since December 2002 trade at prices that are, on average, 34% higher than our fair value estimates, compared with 9% for our coverage list as a whole. Companies issuing convertibles since December 2002 were almost three times more likely to be trading above our fair value estimate than below it.

To be sure, these convertible issues are heavily concentrated in the tech sector, the most overvalued sector we cover. Telecom-equipment (Alcatel (NYSE:ALA - News), Lucent Technologies (NYSE:LU - News), ADC Telecommunications (NasdaqNM:ADCT - News), and Juniper Networks (NasdaqNM:JNPR - News)), software (Computer Associates (NYSE:CA - News) and Veritas (NasdaqNM:VRTS - News)), and semiconductor (Advanced Micro Devices (NYSE:AMD - News), Intel (NasdaqNM:INTC - News), LSI Logic (NYSE:LSI - News), and Micron Technology (NYSE:MU - News)) firms feature prominently on the list. But accompanying them are a diverse group of companies including Halliburton (NYSE:HAL - News), Electronic Data Systems (NYSE:EDS - News), Teva Pharmaceutical (NasdaqNM:TEVA - News), Mandalay Resort Group (NYSE:MBG - News), Navistar International (NYSE:NAV - News), Gilead Sciences (NasdaqNM:GILD - News), JetBlue Airways (NasdaqNM:JBLU - News), and International Game Technology (NYSE:IGT - News)--all with market prices more than 25% above our fair value estimates.

Convertible issuers with market prices below fair value are just as telling, since many fall into the category of special situations. Of the nine companies in this bucket, four were rather oddball cases: DST Systems (NYSE:DST - News) issued convertibles to help major shareholder Janus save on taxes. Johnson & Johnson (NYSE:JNJ - News) issued less than $1 million of convertibles for a subsidiary. Tyco International (NYSE:TYC - News) was in a bind and couldn't raise any debt at all unless it agreed to give bond investors equity participation. And Level 3 Communications (NasdaqNM:LVLT - News) combines dire financial straits with an extremely speculative business, so it shouldn't be surprising that it had to give up some equity to raise new capital, or be shut out of the capital markets altogether.


The Market for Lemons

Skeptical investors (like us) look at the issuance of a convertible as a signal that management thinks its shares (or options on its shares) are overpriced. This is especially the case when a company uses a convertible bond to retire old debt rather than to fund expansion. That's equivalent to a company simply imbedding a call option into its existing debt in order to lower the interest payments. Which party, the buyer or the seller, do you think has the advantage in this bet?

If this line of reasoning sounds familiar, it's a variation on the idea of a market for lemons that Morningstar equities strategist Mark Sellers wrote about last November. Like the market for used cars, this is an example of a situation where the buyer and seller have different levels of knowledge about the quality of the product. The used-car market can become a market for lemons (lingo for a troublesome car) because used-car sellers won't part with a gem (a trouble-free car) for a lemon price. Meanwhile the buyers have a hard time distinguishing the gems from the lemons. Thus, gems get held off the market until they develop problems and turn into lemons.

The same can often be said of convertible bonds. Management will nearly always avoid selling call options on its company's stock unless it can somehow persuade investors to pay more than the options are worth.

If you own stock in a company issuing convertibles, take a good look at the firm's motivations for the issue. Funding expansion, as many Silicon Valley firms did during the last decade, doesn't carry the same bad signal as the replacement of existing debt. Special situations, such as severe financial distress (Level 3 or Dynegy (NYSE:DYN - News)) or actions required to buy time to regain investor trust (Tyco), also don't carry as bad a signal. But if a company is using convertibles to retire existing debt, take a good hard look at why the firm is selling options on its own stock. If you're considering investing in a company that has recently done this, think twice.


Can You Blame Them?

You can't really fault companies for taking these actions. Management teams are paid to look out for the best interests of their current shareholders. Sometimes, doing so requires taking advantage of potential new shareholders to benefit existing shareholders. The firm reduces its debt and interest burden--or perhaps raises funds for a capital-intensive project--in exchange for an option that might end up expiring worthless. And the buyers of the convertible bonds are supposed to be knowledgeable investors who can look out for themselves.

But if you're considering buying one of the stocks we mentioned above, keep in mind the signal the company has sent about its stock price. For a convertible bond to appear attractive, the issuing company often holds off on announcing disappointing news until a few months after the deal is completed. Caveat emptor.