Convertible bond (CB) issuance, which has been low for the past two years, began 2013 with a flurry of new issues in Europe and is set to continue its revival through the year according to Lombard Odier Investment Managers.
The recent sharp pick-up made it the strongest start to the year on record for Europe, based on volumes, and reflects companies seeking to benefit from increased investor appetite for risk and recoveries in share prices while making issuers more comfortable that CBs can be issued at prices which adequately reflect the value of the company.
“After years of anaemic issuance, the European convertible bond market has recently found new dynamism,” said Maxime Perrin, the firm’s product specialist. “There has been a number of bumper issues recently, including Deutsche Post, Nokia, and VW, which have all sparked interest in the asset class. Investors are also waking up to the impressive performance convertibles have delivered during the turmoil of recent years – the main index is up 17.8% over three years and 13.7% over five years, compared to 14.6% and -15.8% for equities.
“The market should continue to perform strongly in 2013. As investors re-risk, convertible bonds are an attractive proposition between bonds and equities, and the inflows into the convertible bond asset class reflect that. They’re particularly appealing in an environment like today’s, where corporate credit is overpriced but there is still uncertainty over equities. Convertible bonds offer the opportunity to participate in an equity market bull run, while protecting against downside risk.
“We currently have a substantial overweight to Asian convertibles. With 21% of Asian convertibles trading below fair value, the market offers a cheap way to gain exposure to Asian stock markets, with reduced risk. Core Europe should also do well in 2013, although we are still cautious about European peripherals. One of the big questions for 2013 is whether the US convertibles primary market will prove as active as Europe over the past few months. We fear that it will disappoint on this score, but would be happy to be proved wrong.”
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