Convertible Arbitrage

Global equity markets finished the third quarter in risk-off mode, as a number of concerns—ranging from Chinese real estate debt to a spike in energy prices and the corresponding inflationary pressures—led to the first monthly decline in the MSCI World Index since January, down 3.83% in local currency terms. Nevertheless, the index remained roughly flat on a quarterly basis, up 0.24% in local currency terms. Similarly, corporate credit markets suffered in September but stayed in moderately positive territory for the third quarter. Global convertible bonds, however, lost 0.94% in the quarter, partially explained by a weaker bond market, underperforming underlying equities, and somewhat softer convertible valuations. The softer valuations contributed to convertible arbitrage strategies giving back some of the year’s gains, with the HFRX Relative Value Fixed Income Convertible Arbitrage Index losing 0.23% in the third quarter.

Unsurprisingly, convertible new issuance slowed down during the summer period. A total of $25 billion of new deals were priced in the third quarter, of which $12.1 billion came from U.S. issuers, $6.1 billion came from Asia excluding Japan, and $3.2 billion came from Europe. Encouragingly, Japan accounted for $3.6 billion of supply, which represented the first meaningful showing from the region in several years.

SPAC issuance increased from the second quarter but was still well below the record pace set in the first quarter. There were 88 SPAC IPOs in the third quarter, generating proceeds of $15.9 billion. In addition, there are currently 120 SPAC business combinations that have been announced but not yet closed; this is equivalent to $34.8 billion of capital, and assuming they all close, represents a pro forma enterprise value of $318 billion. The euphoria of SPACs early this year has morphed into a market that presents low-risk opportunities for solid yields backed by U.S. Treasuries in trust accounts with upside optionality.

Significant supply chain disruptions and a surge in energy prices are fueling inflation, while several central banks have turned more hawkish. COVID-19, the U.S. fiscal debate, and China, among other challenges, also remain on investors’ minds moving into the fourth quarter. Against this more uncertain backdrop, volatility may rise and support hedged convertible portfolios.

For more information on Convertible Arbitrage, visit angelogordon.com/strategies/multi-strategy/arbitrage/convertible-arbitrage/

The convertible primary market is on track to reach last year’s strong issuance level.

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

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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