The head of fixed income at GAM has advocated a novel type of convertible bond as a way of simultaneously slaking pent-up buyer thirst for the asset class, and allowing Europe's governments to make good use of their state-owned entities.
The head of fixed income at GAM has advocated a novel type of convertible bond as a way of simultaneously slaking pent-up buyer thirst for the asset class, and allowing Europe’s governments to make good use of their state-owned entities.
Tim Haywood (pictured) says appetite would exist on the buy-side for public bodies to issue convertibles from some of the companies they took large stakes in during the 2008/2009 crisis, and which they might be looking to trim or offload four years on from the onset of the crisis.
Publicly owned banks in Germany and the UK are prime possibilities here, he says, though as peripheral Eurozone governments bail out their banks further, candidates might emerge.
Bankia in Spain is also being rescued by Madrid.
Haywood says convertibles from banks could be structured to convert into equity if the issuer’s main capital ratios deteriorated to pre-determined levels, on the downside, for buyers, akin to ‘Cocos’.
But he adds the securities could also convert to equity if sharemarkets rise to pre-defined levels, thus offering buyers upside as well.
Lower-than-normal convertible issuance this year has left buyer demand unfilled, and this ‘exchangeable’ convertible could “help governments extricate themselves” from their unwanted ownerships”, he says.
“This structure could have a positive conversion element if the share price rose, so buyers could participate in the upside. The convertibles would convert to equity in a crisis, but also if markets went well. If convertible issuers want to tap the convertible bond buyer universe and latent demand, it would seem wise to include this positive conversion element.”
Haywood and his fixed income team at GAM are working in what have become diabolically complex markets, with risk and little yield at the ‘safe’ end of ‘core debt’, both risk and volatile yield fluctuations among peripheral debt, and aggressive activity – or, at least, posturing – by central bankers worldwide bidding to stop markets barring countries from borrowing from open-market lenders.
Even though yields on much core debt has fallen to negligible or even negative yields, and the existence of ‘risk-free’ borrowers has largely disappeared, he says core debt remains “the default position where liquidity resides, and against which everything is judged” for fixed income buyers.