Issuance has struggled thus far with managers laying the blame on the severe dislocation seen in the opening months. The first quarter of 2016 only saw $16.6bn (£11.5bn) of global issuance compared to $27.2bn in 2015. Average first quarter issuance between 2006 and 2015 was $27.7bn, which included a disproportionately low $5.9bn in 2009.
April and May this year saw $6.8bn versus $12.7bn in 2015 and $15.5bn a year before.
The outlook for the rest of 2016 remains bleak. Managers have said a continuation of this would severely impact the asset class, with the Asia ex-Japan market potentially entering a decline within 15 months.
The current drop is heavily weighted to the US market, where first quarter issuance fell 80 per cent from 2015 to 2016. Europe, conversely, saw its highest first quarter level this year since 2013.
| Key numbers |
47: Reduction in the number of convertible bond issuance deals from January to May 2016 to 2015 39%: Fall in the level of issuance between Q1 2015 and Q1 2016. |
Maxime Perrin, an analyst at Lombard Odier Asset Management who works on the ¤5.1bn (£4bn) Convertible Bond fund, said short-term concerns could be swept aside, but the full extent of the asset class’s decline would be known later in 2016.
“The big months [for issuance] are February, March, September and October. We could be surprised in September and October,” he said. “We want to see if the primary market regains its dynamism.”
Davide Basile, manager of the ¤1.4bn RWC Global Convertibles fund, said he was already warning investors, and that issuance would not pick up until interest rates rose. He said with low rates the rationale for companies to issue convertibles was weaker.
He said: “We are seeing issuance, but it is usually replacing other convertibles, the company is doing a share buyback or other special situations, or it’s an exchangeable bond. Until we have a higher interest rate environment the issuance level will not return to what it was six or seven years ago.”
Mr Perrin said the impact of this year’s poor market would not be apparent in the short-term because, for most regions, the level of bonds reaching maturity was relatively low.
Figures from Nomura showed 12 per cent of US convertibles, 16 per cent of European, 2 per cent of Japanese and 31 per cent of Asia ex-Japan would be redeemed by the third quarter of 2017.
| Analysts query bonds’ viability for investors |
In addition to weakening issuance, both RWC’s Davide Basile and Lombard Odier’s Maxime Perrin said many of the bonds coming to market were not viable for investors. Despite higher interest rates in the US than Europe, issuance from across the Atlantic was weak. Mr Basile said European issuers were taking advantage of the dislocation. He said: “The issuance that has come from Europe has been unattractive. Companies in the European market have realised there is a demand for the product. We have not participated actively in the European issuance.” Mr Perrin was equally critical of issuance seen in both markets. He said there was a number of “opportunistic convertibles” from European firms in the past three years. “Earlier this year, you have seen cases where companies went to a market-maker and structured a deal around their own design,” he said. “What’s difficult is not to fall victim to the new issue craze. The difficulty there is to say ‘I don’t want that’.” |
Mr Perrin said: “Given the current level of issuance, Asia ex-Japan will experience a contraction of its regional universe over the next 15 months. If a quiet market continues beyond 2016 and 2017, then investors will likely see some crowding and the increased use of synthetic bonds.”
Mr Basile was more positive about the outlook. He said the asset class had been through many periods of low issuance in its history. However, he did note the current struggle was in a protracted period of low interest rates.
He said the nature of the bond, which can shift from being bond-like to equity-like depending on markets, meant the investible universe via the secondary market increased with volatility in either space.
However, Mr Perrin said a boost in the primary market was essential. He said an anaemic primary market would leave bonds too sensitive to bond and equity markets.
Mr Perrin added increased primary issuance would provide fairer valuations, as newer bonds would correct scarcity value and add diversification.
