• HEARD ON THE STREET

• NOVEMBER 4, 2008

Yield of Dreams for Convertibles

By GR E GO RY   Z UC K E RM A N

Where there is forced selling, there is usually opportunity. That is what investors can find in convertible bonds.

Those securities, exchangeable into shares at a set price, have felt some of the most acute pain in recent
months. Hedge funds have been dumping them for weeks, under pressure from lenders to come up with more
collateral and from investors seeking to withdraw from the funds. With hedge funds accounting for a large part of
demand, and relatively few other buyers focused on the market, price swings have been exacerbated.

That is creating bargains.

The best opportunities are in larger, liquid issues that were easy to offload. One example: a convertible security
issued by Archer Daniels Midland, whose market value has fallen by nearly half during the past five months, to
$13.6 billion. The convert's price has fallen so far that its original 6.25% coupon now sports a juicy yield of
almost 11%, well above the stock's dividend yield of 2.5% and the 6% yield on the agricultural producer's regular
bonds.

As a "mandatory" convertible, it will be swapped for ADM shares in June 2011. That makes it sensitive to the
swings in ADM's share price. If the stock, trading around $21, rises to $47.83 when the convertible matures in
June 2011, holders will receive just over one ADM share for each security they hold. If the stock stays below
$39.86, holders will receive 1.25 shares. Any price in between, holders will get a ratio that works out to $50 for
each convertible

These ADM's convertibles aren't as secure as the company's regular bonds, of course, because there's no
promise to return an investor's capital. But the securities are safer than the company's shares in a default
because the convertibles are higher on the capital structure. And the generous yield provides some protection if
the stock drops further, and the holders still get upside if it rallies.

Fans of Amgen also should consider its converts ahead of the company's shares. The biotech giant's convertible
bond has a 0.375% coupon. That seems measly until one examines the impact of an 11% drop in the
convertibles since August. The convertible security now has a yield-to-maturity of 3.2%, which includes the
coupon and the expected appreciation of the bond back to its par value. Amgen, which has a pristine balance
sheet, pays no dividend on its common stock, which has climbed almost 10% in the past year.

The security matures in February 2013, giving investors the option to convert into shares at $79. That is above
the current $61.55 price. But Amgen has a top credit rating, so the convert is a safe way to wait for the stock to
climb again.

The hedge-fund pain could lead to investor gains in this often-overlooked corner of the bond market.