Hybrid Vigor: Vol 2 Issue 9 "Mandy, Mandy"

Dear Friends,

Call us biased, call us naïve, call us whatever you like. We wouldn’t have started Hillside Advisors and Hybrid Vigor if we didn’t have a deep sense that the convertible market is underused, underappreciated, and undersized. It could triple or quadruple and still be tiny in the scheme of things, and we keep thinking one of these days that will start to happen.

That said, the overwhelming headwind of near-zero rates is an ongoing challenge. This is especially true since one of the first questions (if not THE first) asked by potential new investors is “what kind of yield can you get with convertibles?”  The saying attributed to Will Rogers, that return of your money is more important than return on your money, always comes to mind here, but we know that saying by itself doesn’t write tickets or pay bills.

Given the lack of yield, it doesn’t surprise us to see the big role mandatories are playing so far this year.  It’s both funny-money yield and not, depending on how you choose to look at it. After all, the tradeoff between more income and less upside used to be a big part of traditional convertibles.  And, as we mentioned in a recent note, one of the smartest convert arbs we talk to is turning more to mandatories because of the challenges in hedging an increasingly, if somewhat unintentionally, credit-sensitive traditional market.

So there’s no blame and no hate—not for the buyers, and certainly not for the issuers. Stock prices being what they are, coming to market with a mandy these days makes a ton of sense.  We just hope that the proportion of mandatories doesn’t get too big, largely because our wirehouse days have us perpetually concerned that a lot of the buyers (and their representatives) don’t really understand what they’re getting.

The week itself was generally quiet, capping a strongly up February.  We’ve put a couple of new spins on the HOCS 20—see inside.  Also read on for, among other things, George Lynch’s comments on the new Rovi deal, and for Jeff Alton’s suggestion for a new issue in an intriguing corner of a familiar sector.


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