Convertible Bonds Bounce Back - 8 Мая 2009 - Еебизнес.ру - новости бизнеса

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Четверг, 13.05.2010, 12:23
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Convertible Bonds Bounce Back
Last year's short-sale ban destroyed the convertible bond market

The market for half-stock, half-bond hybrids known as convertible bonds has sprung to life.

Derivatives and anything slightly complex are supposed to be out of favor right now, but one preferred security of hedge-fund managers has recently staged a comeback. Convertible bonds, after having the market for them killed last year by the temporary ban on short-selling financial companies, have surged 11% this year.

Investors and companies have returned to the market, opening up another venue for companies needing to raise cash. Among them, mining company Anglo American ( AAUK - news - people ) and steel giant ArcelorMitall have recently sold a combined $3.2 billion in convertibles.

“It’s the start of a rebound from an astonishing washout in 2008,” says Barry Nelson, senior vice president at Advent Capital Management, which manages $3.5 billion in funds. After losing 36% last year, convertibles were so beaten down, he says, that many buyers were drawn to the bargain prices. He sees fewer hedge funds and more mutual funds entering the market, especially bond and equity funds that have the flexibility to pick them up.

Retail investors now have the option of buying an exchange-traded fund. On April 16, State Street launched the first such fund for convertibles: the SPDR Barclays Capital Convertible Bond ETF ( CWB - news - people ).

Convertibles are hybrids, half common stock and half bond. Buyers get a coupon payment and the option to exchange the bonds for shares if a company’s stock climbs past a given price. Companies benefit because convertibles usually pay a smaller coupon than other bonds and rating agencies often treat them as equity, less of a burden than other debt.

Convertible bond owners sit behind other debt holders, so if a company goes under, they’d likely take a larger loss.

Last year was disastrous for convertible bonds, largely because the market’s fortunes were closely tied to the health of hedge funds, which have always played a leading role in the market. When banks tightened credit for funds and called on them to put up more assets as collateral, the convertible bond market fell apart as hedge funds sold them off to raise cash, according to a recent report from J.P.Morgan’s equity derivatives strategy group. Falling stock markets made the bonds’ equity options worthless.

Banks wound up holding hedge funds’ convertibles as collateral and sold them, too, Nelson says. In September, the market lost 15%, the following month 17%. Those months matched the worst annual drops Nelson says he had seen in more than 30 years.

The door also closed to companies hoping to sell convertibles. In the first two months of this year, only two companies managed to break into the market: Sandridge Energy and Newmont Mining ( NEM - news - people ).

Nelson says old and new clients now deposit their savings in convertible bond funds with the idea that they can play an eventual stock market rebound and get a steady yield while they wait.

Matthew Craft
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