Once the last refuge of the destitute, the convertible-bond market is doing brisk business nowadays. Just a day after networking gearmaker Juniper ( JNPR) sold a bunch of bonds, rival Lucent ( LU) became the latest high-tech outfit to embrace this cheap form of refinancing. Juniper on Tuesday placed $350 million worth of so-called zero-coupon convertible bonds, which pay no interest but give holders the right to swap their debt for stock later. After the market closed Wednesday, Lucent rolled out its own $1.3 billion convertible offer. Specific terms weren't available, though recent deals suggest the bonds will carry a significantly lower interest rate than other Lucent debt. Not long ago, convertible bonds carried a stigma because selling them promised to dilute current shareholders, pushing down share prices. But now, investors seem less apt to tar all issuers with the same brush. For instance, Wall Street darling Juniper held its ground Wednesday, rising 8 cents to $13.97, but still-struggilng Lucent dropped 6% in after-hours trading following its announcement. In any case, at the terms being offered, companies would be foolish not to rush to the market, some observers say. It used to be that "when a tech company went for a convertible, it usually rang a warning bell," says a New York money manager who has no Juniper positions. "Now, I see some of these deals and I think there may be too much money in the market and they've got to put it to work."
converting the bonds to common stock. As of last month, Lucent had reduced the outstanding balance on its first convertible by 50% to $943 million, while trimming its second convertible by 34% to $1.1 billion. Still, the conversions have been painful for shareholders, who have seen the company's share count increase by more than 15%. That in mind, some observers warn that there isn't necessarily a correlation between heavy convertible bond market activity and a strengthening tech market. Most convertible deals are structured in a way that is favorable to certain traders known as arbs who specialize in playing the risks of one type of investment off against another. In other words, most of these deals are well out of reach of the average investor. Even so, don't be surprised if a whole crowd of tech shops rush to follow the Lucent-Juniper lead.