Outlook for convertibles

ON BONDS

The primary market for global convertible bonds is challenging at present because both interest rates and equity valuations are low.

When rates are low, large investment grade companies can borrow cheaply in the straight bond market, lessening the need to manage debt servicing cost by including equity options. And in any case, most finance directors would not be happy selling options here with equity markets at historically low multiples. This squeeze on supply has two main implications for investors. First, the total universe of convertible bonds is stagnating with a shortage of attractive new ideas. A $500bn market with average maturity of 5 years means that approximately $100bn in new issuance is required each y...