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The conversion feature of a convertible security (the call option) hardly has any value if the common stock underlying that convertible trades below the effective conversion price. Convertibles in this situation are usually referred to as “busted” convertibles because they trade at high premiums over conversion value. These “busted” convertibles will trade near or at their investment value (the bond value) and thus, have virtually no sensitivity to the movements of their underlying common stock.

Still, many fixed-income investors find these so called “busted” convertibles attractive alternatives to other corporate bonds because of their potential for capital appreciation should the issuing company’s fortunes turn around. Investors with a bullish outlook over the long term generally buy these convertibles with two objectives in mind: (i) receiving a generous yield; and (ii) the appreciation in the value of the convertibles, assuming the underlying stock advances.

We screened the Value Line database of over 570 securities (bonds and preferred stocks) for a list of “busted” convertibles, convertibles trading with premiums over conversion value greater than 50%. Below is a partial list, which includes convertibles with a current yield of at least 7%.  

 

Recent

Conv

Conv

Conv

<----------Common--------->

Convertible Securities

Price

Curr Yld(%)

YTM(%)

Prem (%)

Industry

Price

Yield

Ticker

BPZ Resources 8.5s2017         

94.50

9.0

10.6

85

PtrlPr

$2.05

 NIL

BPZ 

Capstead Mortgage $1.26 B      

$13.88

9.1

 PFD

74

REIT 

$12.53

13.2%

CMO 

Cincinnati Bell(Brdwng) $3.375 

$45.00

7.5

 PFD

750

TelSrv

$3.67

 NIL

CBB 

Geomet $0.80 A                  

$8.44

11.4

 PFD

 NMF

PtrlPr

$0.13

 NIL

GMET

GEVO 7.5s2022                  

64.50

11.6

15.6

 NMF

ChemDv

$1.28

 NIL

GEVO

Lexington Corp. $3.25 C        

$46.50

7.0

 PFD

79

REIT 

$10.69

4.3%

LXP 

Molycorp 6s2017                

79.63

7.5

13.7

 NMF

Mining

$5.01

 NIL

MCP 

PetroQuest Energy $3.4375 B    

$36.00

9.5

 PFD

153

OlfdSv

$4.14

 NIL

PQ  

School Specialty 3.75s2026     

39.88

9.4

21.4

999

RetSpc

$0.01

 NIL

SCHS

TeleCommunic Systems 7.75s2018 

98.88

7.8

8.3

328

Intnet

$2.39

 NIL

TSYS

* Prices as of January 24, 2014

Selected Convertibles Highlights:

BPZ Resources (BPZ) engages in the exploration, development, and production of oil and natural gas. The company has exclusive license contracts for oil and gas exploration and production covering approximately 2.4 million acres in four properties in northwest Peru. It also owns a minority working interest in a producing property in southwest Ecuador. BPZ Resources is currently executing the development of the Corvina oil discovery, the redevelopment of the Albacora oil field, and the exploration of Block XIX, in parallel with the execution of an integrated gas-to-power strategy, which includes generation and sale of electric power in Peru and the development of a regional gas marketing strategy.

Although BPZ had a bad 2013—sales dropped over 60% in the first nine months compared to the first nine months of 2012—per-share loss was slightly better. The company reported a loss of $0.41 a share for the first three quarters, compared to a loss of $0.46 in 2012. Hence, the stock is highly volatile and remains dividendless.

As an alternative, the “busted” convertible note offers investors income and the potential to appreciate should the stock advances. It offers a 9.0% current yield and a 10.6% yield to maturity.

Molycorp, Inc. (MCP) is a rare earth oxide (REO) producer in the Western Hemisphere. The company's rare earths are critical inputs in many existing and emerging applications including clean energy technologies, such as hybrid and electric vehicles and wind power turbines; multiple high-tech uses, including fiber optics, lasers, and hard disk drives; numerous defense applications, such as guidance and control systems and global positioning systems; and advanced water treatment technology for use in industrial, military, and outdoor recreation applications.

Although the nine-month sales total of $432.4 million was $38.3 million (or 9.6%) higher than 2012’s figure, the company reported a third-quarter loss of $0.41 a share, which brought the nine-month loss total to $1.18 a share. This compared unfavorably with the $0.97-a-share loss in the same period a year earlier.

The “busted” convertible serves as an alternative to the common stock, which is highly volatile and pays no dividend. The convertible currently yields 7.5% and 13.7% to maturity. And while participation in the common’s activity is extremely limited, the convertible stands to increase in value if the common stages a significant rebound.

Cincinnati Bell (CBB) is a national provider of data and voice communications services and a regional provider of wireless communications services. It operates three segments: Wireline, Wireless, and Data Center, IT Services, and Intersegment.

The company’s third-quarter results were better than expected. While sales of $310.8 million were down nearly 16%, per share earnings tripled. For the nine months, sales totaled $948.5 million, compared with almost $1.1 billion for the same time a year earlier, while per-share earnings of a penny compared less favorably with the $0.07 a share earned in the corresponding period in 2012.

The convertible preferred offers income and potential to gain value if the underlying common stock were to advance significantly. The preferred current yield is 7.5%; the common pays no dividends.

At the time of this article's writing, the author did not have positions in any of the companies mentioned.