You know, if a singer as talented as Adele can have an off night at the Grammys, and if a master of his own universe like Kanye West can be $53 million in debt and make a fool of himself begging Mark Zuckerberg for $1 billion, then maybe we need to cut the poor convertible market a little slack. It seems nobody is perfect—with the possible exception of Lin-Manuel Miranda, the creator and star of Hamilton. It seems there are a million things he hasn’t done. Just you wait. Just you wait.
We saw some green shoots last week, with some days of outperformance by small caps and the Nasdaq, and signs of life in biotech. Still, convertibles, in general, have to be considered disappointing so far this year. But we’ve seen this movie before— disappointing performance during nasty downward market moves, but catching up to expectations and passing them over time. Yes, it’s easier for convertibles to do this in a time of healthier coupons. Still, as we see more and more bonds drop well below par, this is arguably a better situation for those concerned with credit deterioration. Better to drop from 70 or 80 than from par.
Today’s action continues to be generally encouraging, even with oil failing to follow through on talks of a production freeze, and even with the pain being sustained by HOCS member Gogo. Let’s just say Lady Gaga’s take on David Bowie was a lot better than the way Gogo stock and bondholders must be feeling at the prospect of losing American Airlines as a client. No truth to the rumor, so far as we know, that Lady Gaga will be buying Gogo and changing its name to Gaga. But we’ll address this, and other topics, in a forthcoming piece on the company.
We leave you with this thought. In the middle of last summer, the average bond on the main HOCS 20 list yielded about 2 1⁄2% and carried roughly a 50% conversion premium. The premium hasn’t changed much from then to now, but the yield has doubled, and the bond price has fallen from roughly par to 90.
A better entry point? As our favorite anti-hero Walter White would say, “You’re (expletive) right!”
(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).