Convertible Arbitrage

The macro backdrop remained constructive for global equities throughout the second quarter. The MSCI World Index added another 7.15% in local currency terms, taking the first half return to 13.29%. Global COVID-19 cases continued to decrease from peak levels recorded earlier in the year as vaccination programs made further progress. The easing of restrictions across multiple countries supported economic activity and boosted investor sentiment. An overall strong corporate earnings reporting season added further impetus. Corporate credit recorded positive returns across regions in the second quarter, with high yield outperforming. Government bonds recovered in the U.S. and the UK, but remained under pressure in Europe. Global convertible bonds gained 3.24% in the second quarter, as measured by the ICE BofA Global 300 Convertible Index. The HFRX Relative Value Fixed Income Convertible Arbitrage Index—a performance indicator for convertible arbitrage strategies—managed to eke out a 1.33% return in the second quarter, even as convertible valuations came under pressure due to strong primary market activity.

Convertible new issuance maintained its record-breaking pace. The second quarter saw $39.6 billion of new bonds added to the market, which brought the year-to-date total to $98.9 billion, surpassing the record deal volume achieved during the first half of 2020. The U.S. remained the most active region with $55.9 billion of new convertible issuance, followed by Asia with $24.1 billion and Europe with $18.9 billion.

Primary activity for U.S. SPACs slowed down substantially in the second quarter, raising $12.8 billion. However, deal announcements and closings picked up considerably late in the quarter. In fact, during the month of June, a record 27 de-SPAC transactions closed. In the nascent European SPAC market, new issuance continued to increase. In the second quarter, 11 IPOs were closed, with the total deal volume reaching $3.4 billion. Two European SPACs signed a letters of intent with target companies. The IPOX SPAC Index lost 0.89% during the second quarter.

We expect volatility to remain supported by a number of factors, including diverging inflation views and the Fed’s hawkish shift as well as the rapid spread of the Delta variant, which appears to have put a stop to the global decline in COVID-19 cases. Convertible and SPAC primary market activity appears set to slow down during the summer months, lending support to valuations.

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

The convertible primary market maintained its record-breaking pace.

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

U.S. SPAC issuance slowed down in the second quarter.

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