“Busted” convertibles are convertible bonds issued by a company whose common stock is now trading so far below the conversion price that there’s virtually no chance these issues will have value as equity, any time soon.
In some cases, though, the issuer of a busted convertible will still be creditworthy, able to make the required interest payments. These issues tend to fall into a no-man’s land, where no one wants them. They no longer act like convertibles yet they’re not traditional bonds.
Nevertheless, they may have value as bonds. Some busted convertibles are yielding 6-8 percent, compared with 4-6 percent on the equivalent traditional bonds. If your broker can’t help you locate busted convertibles, a few mutual funds such as Greenspring (four stars from Morningstar, 10 percent annualized return for the five years) hold significant amounts of busted convertibles.
