Convertibles: Providing Risk Management and Positioned for a Snapback

March 24 Update

“This recovery will be better than most people think. Technology is fast moving, whether it’s bio tech or whether it’s something else. It’s not going to take two years to figure this out.”
- Calamos Founder, Chairman and Global Chief Investment Officer John P. Calamos, Sr.

  • Today’s markets remind Calamos Founder, Chairman and Global Investment Officer John P. Calamos, Sr., of the 1987 market crash, which was followed by a V-shaped recovery. Given the speed with which technology innovates, John expects biotech will need fewer than two years to address the COVID-19 outbreak. Forward-looking markets will anticipate the development as well as the implications for the economy.
  • John stressed the futility of trying to time the markets. John, a pioneer in the use of convertible securities to manage downside risk, advocated convertibles as a means of riding out volatility—and assuring that clients are positioned to benefit when the market turns.
  • For issuers, convertibles are all about providing access to capital. John believes that we’re in one of those periods when access to capital will be very important.
  • In the near term, markets can be expected to continue to react to headlines, including about the strength of the economy. John emphasized the need for Congress to act to support the private sector.

A 3-Part Market

Joe says the convertible market continues to be orderly. Despite the fact that equities are down, spreads are wider and theoretical valuations are off 3%-4%, trading is happening. In fact, volumes are up from what has been typical this time of year and higher than one month ago.

He characterizes the market as split into three buckets:

  • Solvency concerns that are deeply discounted: These include typically cyclical areas with known issues, directly impacted by the economic slowdown. Some had weaker balance sheets coming into this and faced sharp declines right away. Price discovery in this space is challenging as liquidity is not great.
  • Perceived winners: Areas that could stand to benefit coming out of this include some select areas of technology, health care or consumer sectors. In many cases, the stocks have not declined as much as the market, credit spreads are wider but reasonable, balanced converts in this space are generally well bid for, and discounts are narrower than the overall market.
  • Everything else: These companies don’t have solvency issues with the credit, businesses will survive but face some degree of challenges. Trading liquidity is ok but there are wider bid ask spreads.

In general, if you’re a seller you may not necessarily like the prices you’re looking at but you are able to sell if you need/want to. If you’re a buyer you’re not seeing liquidation bids being hit across the board like what occurred in 2009. Here, shorter dated, higher quality paper is holding up well.