In 2015, global convertible bond issuance totaled USD 82 billion, a very decent level, although slightly down in comparison to 2014 and 2013. Overall, the past four years have seen a supportive dynamism in the primary activity across the major convertible bond markets, with repeated but also first-time issuers adding to the global convertible bond supply.
While the volume of the primary issuance is an important element of the renewal of our market, selectivity remains the key pillar. Our philosophy leads us to primarily focus on accessing cheap option characteristics and strong bond-floors. This answers to one key objective: capturing the convex potential of the asset class.
This implies to differentiate between the most expensive convertible bonds – for which the convex potential is considerably limited – and those which, in contrast, display strong drivers of convexity: cheap implied volatility, high credit quality, strong upside potential. Thus, in the latter part of 2015, our preference went to the Brenntag and FCT-Iren new issues, rather than to the latest deals from Vodafone and Total, whose pricing terms at issuance appeared relatively less attractive to us. Similarly, in January, while we found strong value in the Safran 0% 2020 new issue, we did not participate in the Technip 0.875% 2021, which displayed, at issuance, a higher implied volatility level for similar credit quality profile.
In the long run, convertible bonds’ convex potential is what has enabled the asset class to deliver enhanced risk-adjusted returns relative to equities. We were glad to see that this attractive feature was equally evidenced in the shorter term. Over 2015 market ups and downs, the Stoxx Europe 50 NR posted a volatility 3 times higher than European convertible bonds (represented by the Thomson Reuters Europe Convertible Index €-hedged) for an equivalent yearly performance.
Column by Nicolas Delrue