Investment Ideas Home Page

Why The Economist Calls Convertibles ‘the Asset Class for the Times’

Convertible securities are proving themselves to be the “asset class for the times,” says an analysis in the July 10 issue of The Economist (download PDF). Converts were “almost tailor-made for the circumstances of spring 2020,” and it’s easy to “imagine future economic dislocations on the horizon,” according to the article.

The coverage focuses on convertible bonds as a “flexible source of capital,” offering advantages over straight debt or equity for both issuers and investors.

For unproven firms in a capital-hungry business, converts can be “an ideal compromise,” says the article. “Investors are willing to accept a lower interest rate in exchange for a piece of the equity upside. For business owners, convertibles are less dilutive than straight equity. New shares are issued later at a much higher price, if at all.”

Sixty percent of the volume of issues to date this year has been by firms that have been listed for less than three years, according to Calamos Senior Co-Portfolio Manager Joe Wysocki quoted in the article. Included among the more established company issuers are some to whom convertibles represent “rescue finance at lower interest rates and without immediate dilution.” (For more, see this post.)

Global convertible bond issuance January to June set an all-time high for the first half of a year. Such heightened demand marks a shift from recent history when “the trend in corporate finance was to swap equity for debt and not the other way around,” according to the article, as inflation was nonexistent, long-term interest rates were on the steady decline and bond investors enjoyed healthy capital gains.

The challenges today are different. “A big concern is that inflation and interest rates are at the start of an upward trend. A world of high inflation would be a trickier one in which to raise capital by issuing corporate bonds. The nominal value of the bond at redemption would be a lot lower in real terms. By contrast, convertible bonds offer some protection,” wrote The Economist.

Investment professionals, for more insights on why convertibles make sense in clients’ portfolios, reach out to your Calamos Investment Consultant at 888-571-2567 or caminfo@calamos.com. Our founder John P. Calamos, Sr. pioneered the use of convertibles more than 40 years ago and we can make an array of resources and insights available to you. To keep up with the convertible market, subscribe to our U.S. and Global Convertible Market Snapshots.

Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

802455A 721