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Convertible Bonds Are Booming. Here's What You Need to Know. -- Barrons.com

Dow Jones Newswires ·  Mar 24, 2021 19:29

DJ Convertible Bonds Are Booming. Here's What You Need to Know. -- Barrons.com


By Andrew Bary

Convertible bond issuance is booming as companies like Airbnb, Ford Motor, Spotify Technology, and Twitter take advantage of strong investor demand to get attractive financing.

U.S. convertibles issuance so far in March has totaled $21.6 billion, a record monthly total, and that doesn't include a coming $1 billion deal from ViacomCBS (ticker: VIAC). The March tally exceeds the $21.5 billion issued in May 2020, according to Michael Youngworth, the head of global convertibles strategy at Bank of America Securities.

For the year so far, issuance has totaled $37.3 billion. If that pace continues, this will be a record year for convertibles issuance. During 2020, $105.8 billion of new converts were issued, just shy of the record $106.4 billion in 2001.

More investors are attracted to the convertible market, thanks to its impressive showing last year, when it returned 46%. Now, the sector is broadening with many new issuers.

"It's a way to get equity exposure with principal protection; it's a great way to be in the market," says Tracy Maitland, the president and chief investment officer of Advent Capital Management, which runs $11 billion mostly in convertibles. It manages the Advent Convertible & Income (AVK) closed-end fund.

Maitland likes a recent convertible from Ford (F), saying that it amounts to an "option" on the company's recovery and electric vehicle initiatives with downside protection.

Many companies are issuing convertibles with interest rates of zero and at historically high conversion premiums of as much as 60%, which means it will take a sizable gain in the underlying stocks for investors to score on the new deals.

The market is not as appealing as it was when companies like Carnival (CCL) and Southwest Airlines (LUV) issued attractively priced converts in the wake of the pandemic a year ago.

The weighted average rate on new deals this year is 0.5%, with a 46% premium, against an average of 1.5% and a 35% premium in 2020, according to Bank of America Securities.

The $2 billion deals from Airbnb (ABNB) and Ford carried zero interest rates, with the Airbnb convert having a 60% premium. Issuance has accelerated recently with six deals that came to market Monday including JetBlue Airways (JBLU), Redfin (RDFN), and Tripadvisor (TRIP).

Convertibles returned 4.4% this year through Monday, based on the ICE BofA US Convertibles index after gaining about 46% in 2020. The largest convertibles exchange-traded fund, the SPDR Bloomberg Barclays Convertible Securities ETF (CWB) is up about 1%. The U.S. market now totals $345 billion.

Write to Andrew Bary at andrew.bary@barrons.com

(END) Dow Jones Newswires

March 24, 2021 07:29 ET (11:29 GMT)

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