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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 650 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 include convertibles with a current yield of at least 10%. All data are as of 2/26/10.

 

Issue

Recent

Conv

Cv Curr

I.V.

 

Common

Convertible Securities

Size($MM)

Price

Rank

 Yld (%)

Gde

Industry

Ticker

Emmis Communications $3.125 A cv pfd 

$143.75

$14.61

1

21.40

I

Entert

EMMS 

CompuCredit 5.875s2035 cv deb        

$156

$33.88

2

17.30

I

FinlSv

CCRT 

RAIT Fin'l Tr 6.875s2027 (144A) cv deb

$246

$40.88

-

16.80

G

REIT 

RAS 

FelCor Lodging Tr. $1.95 A cv pfd    

$170

$13.00

1

15.00

J

REIT 

FCH 

Carriage Svcs Cap $3.50 cv pfd        

$93.75

$27.25

2

12.80

I

Ind Sv

CSV 

Doral Financial $11.875 cv pfd          

$218

$92.88

-

12.80

I

FinlSv

DRL 

Continental Air $3.00 cv pfd         

$241

$24.75

1

12.10

I

AirTrn

CAL 

PetroQuest Energy $3.4375 B cv pfd   

$74.75

$29.63

1

11.60

G

OlfdSv

PQ  

United Rentals $3.25 cv pfd            

$124

$28.10

1

11.60

H

Ind Sv

URI 

Highlighted Convertibles:

United Rentals (URI) is the largest equipment rental company in North America, serving the construction, corporate, homeowner, municipal and industrial markets. The company has over 580 branches in the U.S., Canada and Mexico. The company has two outstanding convertible bond issues, totaling $287.25 million in aggregate principal amount, and 2.48 million shares of 6.5% convertible preferred (liquidation value $50). The preferreds are callable, but such action by the company is unlikely at current trading levels. Internet: www.ur.com.

CompuCredit Holdings (CCRT), formerly known as CompuCredit Corp. engages in originating and purchasing credit products. The company also markets fee-based products and services, including life insurance, card registration, telecommunication products and services, and debt waiver programs. It provides these services to consumers who are undeserved by traditional financial institutions. Through corporate and affinity contributions, CompuCredit also uses its financial resources and volunteer efforts to address the numerous challenges affecting its customers. The “busted” convertible is way down on the investment grade spectrum, but it could be a worthwhile fit for yield-oriented portfolios. In addition to its generous 17.3% current yield, the convertible’s yield to maturity is also quite hefty at 18.6%. These notes are currently callable, but only if the common stock trades at or above $73.97 for 20 of 30 consecutive trading days. The maturity date is November 30, 2035. Internet: www.compucredit.com.