As of March 24, 2021, $40 billion in convertible bonds have been issued in the U.S. market through 71 issues, in contrast with the $14 billion issued during the same period last year, for 24 issues. By way of comparison, volumes of $70 billion per year would appear to be a fair long-term average for the renewal and diversification of the U.S. convertible pool, with an additional $25 billion for Europe, $15 billion for EX Asia and $10 billion for Japan.
For the global universe, between March 1 and March 15, we are witnessing a downturn in convertible bonds. Convertibles are falling significantly in rising equity markets. This movement is linked to the particularly active US primary market and explains the slightly subdued annual performance of the asset class. This is nevertheless a positive signal for the future.
So, what should we think of this massive influx of new issues?
The recent flurry of issues strikes us as rather opportunistic in many cases and we remain very cautious. Participating in the primary market for the sole purpose of collecting money never constituted a business model in which we believed or to which we adhered. For a convertible investment to be relevant for our portfolios, several criteria are required: an attractive underlying and credit, a non-zero conversion probability and/or a yield to maturity.
Applying these criteria, we did not acquire the Enphase 0% 2026 green bond (70% conversion premium at issuance), Airbnb 0% 2026 (60% conversion premium, negative EPS) or Dropbox 0% 2026 (52.5% premium, few paying customers). We instead opted to finance Shake Shak – a high-end fast food restaurant chain in the US – which issued 225 million 2028 convertibles at 45% premium to finance its geographical expansion. We also participated in Itron 0% 2026 (40% premium) and Ozon 1.875 2026, the Nasdaq-listed Russian Amazon.
Nevertheless, not everything should be bought at issuance. We are taking advantage of the current correction to initiate and/or reinforce our positions in Halozyme Therapeutics 2027, at 68% premium and 1.80% yield, or Spotify 2026, which seems to us to have over-corrected for a market leader and a sustainable business model, at 1.5% yield and 85% premium.
Notable issues and other new portfolio entries :
We therefore remain selective and avoid securities considered too opportunistic, such as Emphase, Mankind, Dropbox, Ford, etc. In Europe, we also acquired Nexi (internet payment services), Prismian (submarine cables), América Móvil and KPN. On the other hand, we did not acquire Voltalia (solar panels) or GFG (Global Fashion Group, with a complex balance sheet and relatively low-end products).
In these somewhat tumultuous markets, we implement, more than ever, our active investment strategy, avoiding all herd behaviour and continue to rigorously select our investments.
Performance of our two Convertible funds since the beginning of the year
Quilvest Convertibles Europe -0.96%
Exane ECI Europe -0.71%
MSCI Europe + 6.81%
Dynasty Global Convertibles : -0.55%
Refinitiv Qualified Global Monthly Hedged : -0.27%
MSCI World : +6.70%