Convertibles survive the crash

Dhe convertible bond market is a small niche compared to the equity or bond market. Of these stocks, a total of $ 350 billion are in circulation around the world, the bond market has a volume of more than $ 100 trillion, and the market capitalization of all stock markets is expected to be around $ 90 trillion. The convertible bond market does not even reach half a percent of the other two securities markets. However, investors specializing in this mixture of stocks and bonds feel particularly at home in this niche market.

“The market for convertible bonds reacted in the corona crisis like in a textbook: In the worst phase, the losses were lower than on the stock market. Convertible bonds also participated in the subsequent price recovery, ”said Frederik Hildner, senior portfolio manager of the asset manager Salm-Salm & Partner, who specializes in convertible bonds, in an interview with F.A.Z. The world stock index MSCI lost 31 percent from the beginning of the year to the low on March 23, but the convertible bond index (refinitive global focus convertible) only lost about 10 percent. Meanwhile, the MSCI is still 10 percent in the red, the convertible index at zero percent. Hildner feels confirmed by the development: “Convertible bonds cushion downwards in difficult market phases and at the same time enable participation in the positive development.”

The conclusion of Stephanie Zwick, who is responsible for convertible bonds at the Swiss asset manager Fisch Asset Management, is similarly positive: “With regard to the events in March and April, kickback protection and participation in rising stock markets worked as desired. Convertible bonds fell significantly less than shares. ”As a rule of thumb: convertible bonds, in English they are called convertible bonds, account for two thirds of the share price increase, but only a third of the price loss.

For Zwick, convertible bonds have demonstrated their protective function compared to stocks in the current crisis and have also participated in the recovery on the stock markets. “Seen in this way, convertible bonds are doing very well in the entire corona crisis environment.”

JP Mandich, Global Head for Convertible Bonds of the Japanese investment bank Nomura, is particularly pleased about the flood of new issues. These have been a good $ 54 billion since the beginning of the year, 84 percent more than in the same period last year. According to him, the volume of emissions at this point in time had not been as high since 2008.

Carnival hit hard

Issuers include, for example, the cruise operator Carnival, which has been hit hard by the travel restrictions of the Corona crisis. The company is traded in the junk market, i.e. in the lower credit ratings. A bond would have required an interest coupon of 11.5 percent. Carnival is now paying 5.75 percent for the convertible bond.

The attraction of convertible bonds is the right to convert. The title can be exchanged for company shares at a predetermined price. However, if the share price has not developed accordingly, the interest income and repayment remain as a safety net. Convertible bonds generally have a medium term of around five years and a rather low interest coupon, as the Carnival example shows. For Nomura specialist Mandich, companies with strong growth can be considered as classic issuers. Convertible bonds are an alternative to the bond market for these companies because they are often part of the high-yielding rubbish sector, where many rating downgrades and thus increasing financing costs are currently in danger.

The United States dominates the convertible bond market. According to Mandich, the new issue came from there $ 34.6 billion. In Europe, it was $ 13 billion, which he also classifies as decent. The French technology group Safran, the Dutch food delivery service and the software company Amadeus issued convertible bonds.

The classic convertible bonds do not count as mandatory convertible bonds, which, as with the steel company Arcelor Mittal, must be converted into shares at a later date. Here, the investor has no right to vote, just like with the coco bonds of the banks, which are converted into shares if the capital base is undershot. Deutsche Bank and Commerzbank, on the other hand, have opted for stocks that in this case are written off and are not converted into shares.

“Because of the extremely long period of extremely low interest rates, convertible bonds are currently an exciting and promising investment,” says Salm-Salm expert Hildner. He believes that knowledge of the market is important in order to select the right credit quality. In other words: private investors could quickly be overwhelmed and should therefore opt for a fund that specializes in convertibles, which also allows a wide spread of issuers.

Hildner believes that the holder structure of convertible bonds has changed compared to the financial crisis. Hedge funds and speculative arbitrage funds, he says, only hold about a third of the market today. “The rest are in stable hands – like ours.” Hildner means long-term investors who prefer to hold securities until maturity. In 2008 the relationship was exactly the opposite. “Convertible bonds are particularly suitable for investments in technology and growth companies, since there is often a high level of interest between the issuer and investors,” advises Hildner.

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