HYBRID VIGOR: VOL 3 ISSUE 47 "Time Machine"

Say what we will about the president-elect, the animal spirits seem to be jumping. At least that is what new issuance in the convertible market is saying. And it’s not just the seasonal rush. December issuance this year is nearly twice that of the previous two years combined. You have to go back to 2013, at the end of a huge year for stocks, to find comparable issuance.

Then again, going back to December 2013’s new issues might bring back some nasty memories. SunEdison brought a two-tranche deal then, and GT Advanced Technologies came to market with the second of its ill-fated issues. Remember them? We thought so. December 2013 also brought RPM’s 2.25%, an Ugly 20 stalwart. You might say that if it’s still on the Ugly 20 then the day of reckoning still hasn’t come, and you’d be right…sort of. The RPM convertible is essentially unchanged from the first issue of Hybrid Vigor in July 2014. So you’ve clipped a 2.25% coupon. Meanwhile the stock has gone up about 20% while paying a dividend comparable to the bond coupon. That’s pretty meager participation, we’d say.

Mark Twain said that history may not repeat itself, but it rhymes. Three years ago, we saw new issues from Finisar—a 0.5% coupon, no less—and from Zillow (sort of) via Trulia, which it acquired. Those two firms were back this month, with Finisar reprising its coupon. We like to say that the convertible business is a market of repeat offenders. Once companies make the effort to learn the asset class, they come back for more, and it’s easier because the market knows their stories.

We stand by our thesis that convertibles are beginning a major comeback as an important financing tool. The 10-year Treasury, even with a bit of a rally this morning, yields well above 2.50% as I write this. Our market has held that 3% is the magic number for convertible issuance, but even 2.50% is enough for an excellent start.

On that note we wrap up Hybrid Vigor for 2016. As always, we thank you, our loyal readers, for your interest and support. We wish you the happiest of holiday seasons and look forward to an exciting and prosperous new year.

(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).