In between the stock and bond markets lies a new type of security that is fast finding favor with radio companies: exchangeable preferred stock.
In the last week, broadcast companies have issued $710 million in the instruments, which start out as preferred stock but can be converted to debt. And at least $400 million more of issuance is expected in the next few weeks.
Attracted by unusually high fees, Bankers Trust New York Corp., Goldman Sachs & Co., Credit Suisse First Boston, and Lehman Brothers are leading the charge. Radio companies, so far, are the main takers.
The instruments appeal to radio companies because these business are looking for capital to support mergers but are suffering from weak stock prices. The new securities allow them to raise capital without diluting stock prices or immediately increasing debt ratios.
"It's a unique instrument that is creating favor because of its flexible nature and where it fits in the capital structure," said D. Geoff Armstrong, an executive vice president and chief operating officer at SFX Corp., which issued $225 million in exchangeable preferred last week through a group led by BT Securities.
Exchangeable preferreds have found a good reception with high-yield investors, whose interest in higher yielding instruments has caused banks to increase the size of many radio deals.
As a result, banks have been scrambling to provide these securities.
"Right now, there is a lot of focus on this market," said Arthur Penn, a managing director in high yield at BT Securities, the investment banking subsidiary of Bankers Trust New York Corp.
The exchangeable preferred stock issuance provides both the loan and bond markets with capital support, giving investors in those vehicles greater protection in the event of financial distress.
"For the bank and bond market, it's a win because there are junior securities coming in beneath them, and for the stock market, it's a win because the company is raising equity capital while minimizing dilution," said Mr. Penn.
In addition to servicing their customers and providing investors with product, banks are reaping attractive rewards for themselves. Fees range from 3.25% to 3.5%, as compared with the still lucrative 2% to 3% in the high-yield bond market.
"These things tend to come in waves," said Phelps Hoyt, a high-yield analyst at KDP Investment Advisors. "When Wall Street finds an idea that they like, everyone will come out with it."
Mr. Armstrong said that any radio company that anticipates growth either within their home markets or through acquisitions would find this arena attractive.
Radio experts said that the capital needs of many companies, coupled with their need to stay below a leverage of 6.5 to 7 times capital levels, favors such issuance.
"This instrument is a good one, because it gives you the flexibility to go and change it into a debt whenever we want," said Jacques Kerrest, the chief financial officer of Chancellor Broadcasting, which has issued exchangeable preferred stock twice in the past two years.
Additionally, many radio companies are now operating at a loss, and as such are not paying taxes. When the companies become more profitable, experts said, radio companies can convert the preferreds, which pay nondeductible dividends, to debt, which have deductible interest payments.
High-yield investors have quickly bought up the securities, thanks to yields that are 200 to 300 basis points above those of typical high-yield bonds.
"These investments represent real value," said Jerry Paul, a high-yield portfolio manager who oversees approximately $2 billion in investments for Invesco Corp.
Thomas Price, a credit analyst at Strong Capital Management, which has over $340 million invested in high-yield bonds, said that the appetite for the exchangeable preferred securities is further evidence of a bull market in the high-yield arena.
Where broadcasting companies have found favor, however, other companies with less stable earnings and liquid assets might not find such a reception.
"In other industries, it might be a lot tougher to get a deal done," because of the lower protection for investors, said Mr. Price.
