When we last published on August 17, the S&P 500 was within a long stone’s throw of its all-time high. China and Greece had had their ups and downs, but we appeared ready to enjoy the last few weeks of a slowish summer.
The good news, we think, is that convertibles appear to have done mostly what they are supposed to do. They’ve given back this year’s gains and perhaps a touch more, but overall they are holding up well. That’s good news, anyway, as long as you’re not sitting there waiting to buy in one of those classic convertible meltdowns we seem to get every handful of years.
The mantra we keep hearing is “just wait for the redemptions.” Perhaps. But the evidence this year continues to speak of demand outstripping supply, and with solid relative performance throughout the year, we don’t think the argument for redemptions is compelling. That said, we confess to having been wrong before, and to having our view tinted by a love for the asset class.
One of the most unfortunate aspects of the recent selloff/correction/microcrash is that it may make getting new issuers to market a bigger challenge. Surely there are many companies out there that missed the chance to monetize their appreciated stock and now think the shares are too cheap to sell, even up 35% or more. What a shame. We hope others will take note of the opportunity to raise capital in a still-hungry convertible market and act accordingly.
And then there are the opportunities for the downtrodden. We just got an email from a European friend and reader wondering why Glencore plc, the big Anglo-Swiss commodities firm, is planning to issue shares instead of a convertible. Well, it appears the company’s goal is to preserve its credit rating, so “no new debt” and eliminating the dividend are front and center. That said, there’s probably room somewhere in there for a convertible structure that could satisfy everyone, at least as part of a plan to rebuild the balance sheet. Our reader thinks, understandably, that management would send a more compelling message about the stock’s cheapness with a convertible. But maybe things are past that point in commodities.
At any rate, we welcome you back and look forward to what promises to be a very interesting final four months of the year. How about those Mets?
(This is the cover letter for the subscription-based weekly Hillside's Hybrid Vigor newsletter. For a complete copy, please contact John Anderson at + 1 (646) 712-9289 x 107).