Whether for equity exposure with downside protection, for asset diversification, or for creating asymmetry, newly issued zero-coupon convertible bonds have been going like hotcakes because of their convexity. In the wake of quantitative easing, these hybrid assets – half-way between bonds and equities – can lead to negative yields if the conversion from bond to equity fails to materialise; a seemingly very unsatisfactory return given such bonds’ low ranking in the hierarchy of debt. “Yet they are not unattractive because their performances are linked to those of their underlying equities”, says Marc Basselier, UBP’s Head of Convertible Bonds.
A more diversified universe
Last year saw a clear trend for share buy-backs. Meanwhile the global convertible bond primary market was on fire, with new issues hitting USD 85 billion.
“2019 was an excellent year for the US primary market with USD 60 billion worth of new issues, and one of the best years since 2001 in Europe once it picked up again in the second half of the year”
states Marc Basselier. He adds that in fact some issues were used to optimise balance sheets by financing share buy-backs.
In the past four years some hitherto unrepresented sectors, including takeaway food, software and semiconductors as well as growth companies, have been added to the investment universe. Even some green convertible bond issuers have emerged: Marc Basselier says wind power start-up NeoN’s first small batch in the second quarter got off to a strong start.
But although conversion premiums are way above 20%, are convertible bonds still worth considering given that equities are at all-time highs? “Convertibles have a lifespan of five to seven years, which makes the premiums more than fair”, explains Marc Basselier. There are more important criteria, such as the bonds’ equity-sensitivity and downside protection, he says. “In the European universe, equity exposure is 40% with the bond floor 12% lower. Equally attractive exposure can be found in the luxury sector, for example, with LVMH’s latest issue maturing in 2022, offering a conversion premium of about 20%.”
Interview of Marc Basselier by Salima Barragan from Allnews
Head of Convertible bonds