U.S. convertible bond issuance has slowed after a rapid start through 2021, and the industry’s $ 350 billion returns are nowhere near as robust as they were last year when
leads the market.
The converts had an excellent year 2020, with a return of 46% on the basis of the ICE BofA US convertible index, exceeding the
S&P 500 ′
s 18% yield and making the sector one of the leading asset classes in the United States. This year, the ICE BofA index posted a return of 9.1% through September 23, behind the 19% return of the S&P.
Tesla (ticker: TSLA), whose shares more than sevenfold in 2020, accounted for around 40% of market performance, thanks to several large convertibles in circulation. Tesla’s influence is much more subdued this year given the buyback of some of its convertible debt and a modest 10% gain in its stock to $ 781.
New U.S. issuance this year totaled $ 67 billion until the middle of last week, but $ 41 billion of that total came in the first quarter, according to Michael Youngworth, head of global convertible strategy at Bank of America. Securities. July was the slowest month for new converts since 2018, with a single deal for around $ 600 million.
Convertible issues are therefore unlikely to match the $ 106 billion sold last year, the largest year of new deals since 2001.
Some leading convertible bonds issued on aggressive terms earlier this year have weakened as their stocks fell.
(PTON) sold $ 1 billion worth of five-year convertibles at a zero percent interest rate that fell to 90 cents on the dollar from 100. This deal had a 65% premium. Convertibles often have premiums in the range of 35% to 40%.
(SPOT) offered a zero percent convertible that is also down about 10%, to 90, since it was issued at a premium of 70%. Both issues are now trading as alternatives to bonds with yields of 2% until maturity in 2026 with the characteristics of converting shares out of the money. The Peloton deal is convertible into shares at $ 239 a share, considerably above the share price of $ 93.
Convertibles are hybrid securities that offer the downside protection of bonds and the upward appreciation of stocks. Youngworth says the market now looks “fairly cheap” relative to fair value. One of the biggest games is the
SPDR Bloomberg Barclays Convertible Securities
exchange-traded fund (CWB), which is currently trading around $ 87. It is up about 7% this year.
Odell Lambroza, chief investment strategist at Advent Capital Management, tells Barron that the global convertible market now stands at $ 650 billion to $ 700 billion and is heading towards $ 1 trillion.
“Things are shaping up for a long and sustained movement in this market in terms of new issues, investor interest and performance,” he said. The broadening of the market over the past year offers investors greater opportunities and “you can do it asymmetrically where you get your money back and have rising equity”.
The relatively short maturities on convertibles help investors in a rising rate environment, he says.
Youngworth said this was a “Goldilocks” market in 2020, when almost everything went well for convertibles. Tesla has made a monster contribution. Growth companies, large convertible issuers surged, and many so-called bailout deals for cruise lines, airlines, retailers and other businesses hit hard by the pandemic recovered in the second half of the year.
Write to Andrew Bary at [email protected]