Convertibles keep rolling off the assembly line: New deals continue to expand the market

The convertible bond market expansion shows signs of further acceleration this year, with deals now coming from a broader variety of issuers than those of the tech sector, or the re-opening and recovery plays such as airlines, that drove issuance in the first pandemic-led lockdown of a year ago, says Justin Craib-Cox, co-manager of the RWC Global Convertibles fund.


The market for convertibles had a landscape-changing year in 2020 according to Craib-Cox, and this shows no signs of abating so far in 2021.


“We’ve had a huge amount of new issuance in the convertibles market recently which has seen the overall dynamics of the market shift. Now, very recognisable companies are issuing major tranches of convertibles, with household names such as Airbnb, Peloton, Ford, and Twitter all recently coming to market.”


But Craib-Cox said that amid this market expansion and big-name issuance, many companies were able to achieve very good terms for financing, whereas some of the issuance in early 2020 was skewed much more in favour of investors. Although he notes the outlook was far more challenging at that point in time with no vaccines developed and limited visibility into the future.


“It may have been a unique chance in early 2020 to provide financing when the outlook seemed most bleak. But while issuers are achieving better terms than at that point in time, it doesn’t mean that investors will fare poorly from backing deals today. This is due to convertibles coming with an embedded option to convert into equity, not just a coupon payment, as compensation. We do spend a great deal of effort assessing what each underlying stock might be worth in the future, and we do believe that many companies today could still be worth far more in the future, particularly with the rapidly-changing developments around vaccines and potential re-opening of the global economy.


“We did see some technical pressure on the market with such a high volume of issuance in the first quarter, which reduced theoretical valuations slightly. That said, we don’t believe that this is a problem for the convertible market. It’s a simple supply and demand issue – when supply increases significantly, and the size of the investment in the asset class has risen by less – then prices will adjust downwards to reflect that. It’s not a huge correction, we’re talking a few percentage points, but the silver lining is that primary issuance takes its cues from secondary market valuations, which are now cheaper.


“General investment markets still have a lot of uncertainty and volatility in the background to this. While vaccine rollouts in some jurisdictions are going well, other regions such as the EU are still struggling to keep cases down. We still believe that convertible bonds offer a good mix of protection through a bond component, but with the chance to participate in upside if stocks rally.”


The influx of issuance means that the convertibles market has more opportunities than ever before according to Craib-Cox. With a breadth of new issuers, there are great opportunities for those investors looking for the right price, he says.


“The convertibles market is in a great place. There is a much broader pool of investments to consider compared to a few years ago. The coronavirus crisis provided a springboard to this but seeing big name firms become issuers reflects the flexibility of the asset class.


“Looking at the market issue by issue, from the bottom up, there will no doubt be some winners out there, but waiting for the right price at the moment is also crucial. We are content to wait in the case of a few issuers that achieved very attractive terms until their bonds trade with more value left on the table for investors.


“We’re not laying out a case for bearishness– but with so much market activity it’s important to see beyond the noise. Waiting for the dust to settle on that is preferable as there will be good quality convertibles out there priced more competitively than they were before, especially if we continue to see such a strong pace of primary market activity.”

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