Since the 2008 Financial Crisis Convertible Bond Primary Market Issuance floated around $100 Billion a year. Last year, global Convertible Bond issuance hit $180 billion, a 12-year record. The outstanding value of Convertibles in the market increased by more than 30% in 2020, and continues to increase in 2021. This year companies are issuing at unprecedented volumes surpassing $100 Billion in July. The move started in the US in the first months of the pandemic and has subsequently spread across global markets. Wilmott checked in with Serge Kouyoumjian Co-founder and Partner of ITO33 to get the specialists view on what might very well be the asset class of the new-new-normal.
What are the main factors that have led to this growth?
“Difficulty for the companies to raise as much money in other parts of the market in these times of huge stress. Converts were basically issued cheaply (therefore were attractive to investors) and offered juicy upside given the conversion feature and the extreme levels of single stock volatility.”
How much longer can this momentum be maintained?
“As of the end of August 2021, the trend is still very robust and the encouraging sign is that converts activity keeps moving from one sector to another. Travel and Leisure was the first sector to issue converts after the start of the crisis, soon biotech took over, then energy and other tech companies followed. There is always one sector that is keeping the market active.”
Are there any new challenges or complexities that arise out of this increase in activity?
“Sure, as the amounts in play are getting bigger and bigger and as there are some new entrants to the market, some of the sophistication and tech complexity that had not yet reached the CB market, are now spreading fast: willingness to put in place algorithmic trading, trend towards systematic trading based on backtesting, willingness to take full advantage of cloud based architectures to increase the number, type and complexity of scenarios, availability of historical terms and conditions. All this is creating a virtuous circle that is producing a bigger, more active and more liquid market.”
What opportunities remain for issuers and asset managers?
“For issuers: take advantage of a bigger and more established market in addition to the usual advantages of Converts: lower coupons, monetizing equity volatility, cashflow positive due to the conversion …”
“For investors: a more mature market, with more jumbo issues, and with arbitrage opportunities across the equity to credit universe; traders and portfolio managers increasingly trade converts in relation to CDS, corporate bonds, equity options, ASCOTs …”
Is ITO33 seeing new types of market participant emerge?
“More demanding and more sophisticated clients both on the data and on the pricing aspects – more quant and automated approaches to the market, often the result of the intervention of trading boutiques and proprietary trading groups.”
ITO33 is running a survey of quants on what they think is in store for CBs. What makes the quant perspective valuable at times like this?
“The abundance and diversity of deals, the different types of players, and the existence of an ecosystem of equity to credit instruments available to trade, make it a very interesting market to participate in – an appealing one for quants to incorporate into their strategies.”
To have your say on what’s in store for convertible bonds participate in this survey.
Participants in the survey will be amongst the first to receive access to ITO33’s analysis of the results.