Convertible Bond Issuance Has Increased

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Convertible bond issuance has increased during the Covid 19 pandemic.

From a funding perspective, convertible bonds have many attractive features for corporates, which have become more important during the pandemic.

…In volatile markets, the value of the embedded option in a convertible bond increases. The asset class also becomes more attractive to investors owing to its convexity. Convertible bonds give investors equity-like returns on the upside while maintaining bond-like protections on the downside. Read more

What is a convertible bond?

… a convertible bond or convertible note or convertible debt (or a convertible debenture if it has a maturity of greater than 10 years) is a type of bond that the holder can convert into a specified number of shares of common stock in the issuing company or cash of equal value. It is a hybrid security with debt- and equity-like features. It originated in the mid-19th century, and was used by early speculators such as Jacob Little and Daniel Drew to counter market cornering. Read more

Despite their attractive features, when investing in convertible bonds, investors should pay particular attention to the credit risks of the issuers and the sector in general.

A bigger concern, and one that will hold the market back, is credit quality. The convertible bond market is now even more highly exposed to the technology sector, where companies often lack positive free cash flow. Any bursting of the bubble in tech stocks will be disastrous for the performance of convertible bonds.

As reported by Reuters, the default rates will likely to double in 2021,

The default rate among junk-rated European companies will more than double by June 2021 as the COVID-19 pandemic brings about “arguably the most pronounced deterioration in credit quality ever.

…Sectors most likely to be hit by social distancing measures, such as retail, consumer products, transport and leisure, comprise 39% of total outstanding European speculative debt, they said. A further 6% are from the energy and natural resources sectors, which have been whacked by collapsing oil prices. Read more

Accurate pricing and risk management of convertible bonds are vital for the success of investing in convertible bonds.

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