Convertible securities: A surge of new issues provides a deeper pool of opportunity

Companies in a range of sectors are tapping the convertibles market for much-needed capital

With the increased volatility in the capital markets since mid-March, companies seeking access to capital have come to the convertible securities market, driving a surge of new issuance that’s double the pace of this time last year.  The jump in new issues has not only increased the size of the convertible market and boosted trading activity in the asset class but has also broadened the mix of issuers’ sectors within the space,1 and has included household names like  Carnival Cruise Lines, Dick’s Sporting Goods, Southwest Airlines and Calloway Golf.2 This surge of new activity provides investors like us with a wider variety of opportunities.

Convertible issuance has soared

Companies are raising capital to shore up balance sheets ahead of what may be a prolonged period of difficult business conditions. In recent weeks, many of these companies have come to the convertible market, resulting in more new issues and new issue proceeds at any time since before the financial crisis more than a decade ago.3

  • On a year-to-date basis through May 21, new issuance stands at approximately $48 billion in the US, more than double the $20 billion raised through May of 2019.
  • The number of convertibles issued thus far in 2020 is 88, more than twice the number of deals completed through the first five months of last year,3 which was 41.
  • According to data from Barclays, the size of the US convertible market jumped from approximately $206 billion at the end of March, to $250 billion3 as of mid-May, due in large measure to strong primary activity, as well as positive returns as the market rebounded from the March sell-off.
  • Unsurprisingly, trading activity in the convertible market has picked up as well. Barclays calculates daily trading volume of nearly $2 billion, significantly higher than the $1.3 billion daily average trading volume for all last year.4
  • Additionally, turnover, as measured by trading volumes as a percentage of the size of the market, has risen this year as well, topping 260% annualized, up from approximately 230% in 2019 and well ahead of the roughly 200% in the high yield market through the first quarter of 2020.3

Investment opportunities have broadened

Perhaps most important from our perspective, the increase in issuance has provided us with many more investment opportunities at attractive prices. There has been a significant number of first-time convertible issuers in recent weeks, giving us new securities and new companies to analyze. Several companies that have issued convertibles recently are in unique circumstances, some with stock prices that are considerably lower than where they were trading just weeks ago, leading them to raise capital at terms that we viewed as attractive.

What’s more, the mix of issuers by sector has broadened during this wave of issuance. The convertibles market is generally skewed to technology and health care companies, but recent issuance has considerably boosted the number of consumer-focused companies represented in the market.4 Travel, retail, restaurant and leisure goods companies have all entered the mix, and we are assessing the investment attributes of each as their issues begin trading.

Finally, where applicable, we are using these new issues to swap out securities from the same issuer. Many companies issuing new paper have more than one convertible outstanding, and this has provided us with opportunities to exchange an issue with high equity sensitivity for an issue with lower equity sensitivity. This allows us to maintain our exposure to a company, but with an issue that provides a better risk/reward profile in our view.

Learn more about Invesco Convertible Securities Fund

1 Sources: Barclays Convertibles Market Watch (March 2020 and April 2020), and Barclays Convertibles: Resilient Amidst Stress. April 28, 2020

2 As of April 30, 2020, Invesco Convertible Securities Fund had holdings in Carnival Cruise Lines (0.62% of total net assets) and Southwest Airlines (1.32% of total net assets). The fund does not hold Calloway or Dick’s Sporting Goods as of April 30, 2020.

3 Source: Barclays Convert Vantage. May 15, 2020

4 Source: Barclays Convertibles: Resilient Amidst Stress. April 28, 2020

Important information

Blog header image: Juan Moyano / StocksyTBD

Convertible securities may be affected by market interest rates, the risk of issuer default, the value of the underlying stock or the issuer’s right to buy back the convertible securities.

The opinions referenced above are those of the author as of May 29, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

Stuart Novick, CFA
Senior Analyst

Stuart Novick is a Senior Analyst working with the Invesco Convertible Securities team.

Mr. Novick joined Invesco in 2014 and entered the industry in 1989. He was previously a senior credit analyst at Bloomberg, covering special situations in the Bloomberg Industries research group. Prior to that, he was a credit analyst at the Financial Times Group. Mr. Novick started in the industry in 1989 and spent 17 years at Citigroup, where he was a director in the convertible securities group.

Mr. Novick earned a BS degree from the University of Albany and an MBA from Columbia Business School. He holds the CFA designation.

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