In our final issue of 2015, we’ll jump the calendar ahead just a bit and start wrapping up today. Every year has its happy events, and every year is a year we won’t get back. It’s with these truths present that I say this has not been a great year, my older daughter’s Bat Mitzvah and the first Triple Crown winner in 37 years notwithstanding. Markets have struggled, convertible issuance has been lackluster, and many of the supposedly smartest investors in the world have gotten creamed. Well, actually, they’ll be fine. Some of their end investors, perhaps not so much. Meanwhile, most convertible investors, hedge and outright alike, are struggling to stay above water. Desks are shrinking, even as the asset class may—I say may—be set for a pickup as the high-yield alternative becomes less attractive to recently burned investors. Issuers, too, will have to pay coupons more recognizable as “high yield” for that market. At least some of them are bound to return to convertibles.
The Best Laid Plans...
Of mice and men gang aft agley, indeed. SunEdison issued, oh, six convertible bonds and a preferred in a stretch of about 18 months. What could possibly go wrong? Well, as long as you have a tool like HOCS, nothing too much. HOCS viewers were ever cautious—even when SUNE’s market cap was dancing and prancing in the first half of the year, it still was not enough to get favorable HOCS ratings for SUNE’s convertibles. High HOCS scores certainly don’t assure success, but low ones act as effective canaries protecting the collier laddies in the convertible market.
The Devil’s Away
If we want good news, perhaps we find it in the absence of some of the most draconian tax rulings that have been kicked around Washington. Sometimes, no news is good news.
Green Grow the Rashes
There’s enough good about the convertible asset class that there’s usually reason to believe, as a more recent Scotsman sang. Current optimism should spring from a less healthy high-yield alternative, an equity market not too far from its highs despite a tough 2015 and a spry but not frightful level of volatility. What’s more, investors are beginning to recognize they need to explore the debt/equity continuum in more detail, even if the sweetest hours we ever spend don’t involve risk/reward calculations.
For All That
Making money in convertibles, or anywhere else, is a good thing. Let us pray that come what may, the rest of this year and all of next year are good to us. But let’s never forget that those who play the game honestly and loyally, thinking for themselves all the while, may often be on the wrong side of individual trades. But they’re on the right side of the biggest one.
We’ll see you next on January 11, 2016. Auld Lang Syne.
(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).