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Convertible bonds “thriving” as coronavirus caution looms over fragile market recovery, says Man GLG

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The convertible bond market is “quietly thriving” in the aftermath of the market shock brought about by the coronavirus crisis, says Man GLG, the long-running discretionary hedge fund management unit of Man Group.

Convertibles’ primary market has seen record levels of new issuance this year – particularly in the US – with many first-time issuers entering the fray, while at the same time the asset has cheapened to levels not seen for some years, Man GLG said in a commentary this week.

This flurry of activity offers investors “a potentially attractive entry point” into the market, boosting convertible bonds and broadening the opportunity set, according to Danilo Rippa, Man GLG’s head of multi-strategy credit and convertibles, and analyst Chris Smith.

After the coronavirus crisis tore through global financial markets, converts are now seen to offer downside risk mitigation, a cheap entry point and improving liquidity, they said.

Man GLG’s research noted that during the Q1 market meltdown, global convertibles fell 15.6 per cent, while global equities plummeted 33.6 per cent, with the decline in global convertibles equating to 46.5 per cent the fall in global equities. The subsequent market rally in Q2 saw global convertibles advance 17.5 per cent, as global equities surged 37.5 per cent. As a result, global convertibles were able to capture 46.7 per cent of the move higher in equities.

“Given their convex profile, convertible bonds can potentially offer the best of both worlds against the uncertain backdrop – they can behave more like equities in rising markets, while providing downside risk mitigation by behaving more like bonds in market selloffs.”

Although emergency fiscal measures and monetary policies have stemmed volatility and eased some investors’ concerns recently, Rippa and Smith cautioned that assets and markets remain vulnerable to a second wave of coronavirus infections and renewed lockdowns.

“Equity volatility is up, credit spreads are heightened, and around the world, investors are trying to work out how to plug the gaps in their portfolios,” wrote Rippa and Smith. “In contrast, the convertible bond primary market is quietly thriving.”

They added that converts issuance remains strong despite low interest rates – a theoretical headwind to the asset – due partly to wider credit spreads making traditional debt issuance somewhat less attractive.

“If markets turn lower again in the second half of 2020, we may see another pick-up in issuance from firms seeking to resolve near-term liquidity problems.”

Man GLG, the discretionary investment arm of London-headquartered publicly-listed global hedge fund group Man, manages a range of long-only and absolute return hedge fund strategies. Its Global Credit Multi-Strategy hedge fund made a 3.2 per cent return in the first six months of this year.

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