Convertible Arbitrage

COVID-19 vaccination drives and the prospect of more stimulus, particularly in the U.S., continued to boost global equity markets in the first quarter. The MSCI World Index gained 5.74% in local currency terms, and in contrast to most of last year, Europe outperformed the U.S. Not all risk assets managed to remain on an upward trajectory, as sovereign bonds sold off in the U.S. and Europe, contributing to volatility in equities. Despite the rise in yields, the backdrop remained generally supportive for convertible bond strategies, as the ICE BofA Global 300 Convertible Index—an indicator for outright performance—rose 2.44% during the quarter, and the HFRX Relative Value Fixed Income Convertible Arbitrage Index returned 2.18%.

Convertible bond valuations suffered somewhat, particularly in March, as the U.S. market saw a surge of primary market activity and investors struggled to absorb $23.9 billion of new deals. On a global basis, new issuance of convertible securities reached $58.3 billion in the first quarter, marking the strongest start to a year on record. In terms of volume, there is a clear continuation of the strong primary market trend witnessed in 2020. However, there has been a noticeable change in the type of issuers seeking convertible bond financing and the pricing achieved. While last year was dominated by industries that were hard hit by the COVID-19 pandemic, including travel and retail, the first quarter of 2021 saw largely young tech companies come to market in a more opportunistic move. Deal terms have been less investor-friendly, with generally less value on offer.

The U.S. SPAC market also logged a record amount of new issuance. Investors readjusted exposures to accommodate the new deal flow, leading to a significant amount of premium erosion in the secondary market. The IPOX SPAC Index, a performance indicator for the broader SPAC market, lost 1.21% during the first quarter. This created opportunities to accumulate attractive names on a positive yield.

The first quarter results blackout period should bring a welcome pause for new convertible issuance, during which investors can reassess their positioning. More aggressive deal pricing has led to weaker secondary market performance, and we believe opportunistic issuance may need to slow somewhat as a result. The primary market for SPACs has already slowed dramatically, almost coming to a complete stop, allowing market participants to focus on the attractive existing opportunity set.

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The convertible primary market had its strongest start to a year on record. 

The U.S. and Europe continue to make up the vast majority of the convert market. 

SPAC issuance hit record levels in Q1 2021. 

SPAC capital seeking targets may drive record M&A. 

Angelo Gordon’s Capital Markets Perspectives

AG Capital Markets Perspectives (“CMP”) provides our portfolio managers’ views on the credit, real estate, and private equity markets. To access this quarter’s CMP and past quarterly reports, please complete the form below.

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