I'm trying to learn more about the different groups in IB and it seems like working on a convertible bond deal is one of the more interesting assignments you can have if you're in ECM. Could someone break down this type of deal? Why a company would want to issue converts, how it differs from typical corporate bond issuances or equity issuances, what kind of modeling is involved/how it compares to other types of modeling you do in IB (do the ECM guys actually do the modeling, or is that left to the coverage team?), exit opps for someone in ECM who typically did converts deals, anything else interesting... Thanks a lot
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Convertible Bonds (CVs) - kind of debt security that converts to the company's equity at pre determined times at pre determined prices. SO its like a bond with equity option embedded.
Why do it?
Investors - they have the option of converting into equity of a high performing company (if it does well) and take part in the equity story
Companies - as you provide additional option to CV buyer, the cost of capital of a CV is lesser than a striaght bond of similar maturity/risk => cheap financing!
Why a company would want to issue converts--if they think their stock price trajectory will go down, it's advantageous bc there's little chance of eqty dilution, cheaper than high yield.
how it differs from typical corporate bond issuances or equity issuances--not sure what you mean here.
what kind of modeling is involved/how it compares to other types of modeling you do in IB (do the ECM guys actually do the modeling, or is that left to the coverage team?)--converts guys are always working with numbers and have very little interest in the backstory. There is a lot of modeling but different from what a sector banker would do. You'll never be doing DCFs or LBOs, for example--this is left to the bankers. There is very little overlap (if any) if you're working on a pitch/deal with an IB analyst or assoc. Much of your day will be spent pricing terms for potential issuers (involving credit analysis, volatility, etc), running cost of capital models, etc.
exit opps for someone in ECM who typically did converts deals, anything else interesting--no one really understands converts, so you will find many job opps within convert origination or perhaps convert arb. You'll get significant exposure to every group in IB, stock loan desk, convert s&t, structured products, etc. Someone with ECM experience is a dime a dozen, but since converts are considered fairly complex instruments, I'd say exit opps in general are better than someone with straight ECM experience. Also, since you're interacting with every product group (whereas ECM originators are usually divided by sector), exit opps are infinitely better internally.
Convertible Bonds (Originally Posted: 02/21/2008)
I'm starting FT soon, and I'm thinking about joining Convertible Bonds but I don't know anything about them except that they are bonds that convert to stock after a certain share price.
Can anyone share more information about Convertible Bonds or what it's like working in Convertible Bonds? Thanks!
google the wiki page for them. from what i've read, which isn't all that much, their payoffs are similar to vanilla stock options.
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"its the running joke now, we now have fair trade with china so they send us poisoned sea food and we send them fraudulent securities."
they're bonds with an embedded equity option and generally trade off equity desks.
elaine, PM me your email address. Ive got some stuff for you to read/play around with.
Are you joining in on the origination side (ECM) or in the sales/trading side?
Converts are bonds with an option to be converted into shares at a specified price. Because of this upside they are sold at a lower coupon than regular bonds. It works well for companies because in bad years, they can pay a lower coupon and in good years, they can afford to pay out more (buying/issuing shares)
A great product to work with, market is booming. My friends in converts are swamped, mainly becuase with all the equity volatility this is one of the few parts of the market still open for some issuers.
Are you sure that converts are booming? From what I've read elsewhere, new issuance has flagged for a while now. I guess that was mainly b/c the low rates / low vol environment we've seen until last summer made converts less attractive as a source of funding, so I can see how things might have changed now, but so far I haven't heard any reports or rumors that new issuance is up again... Anyone else cares to comment?
Thanks guys... Eric I'm looking at a S&T role not CM
I don't have the stats but I have heard anecdotally the new issue market for converts in the US has been pretty strong YTD, relatively speaking. I believe either Jan or Feb was one of the most active months in quite a while. I think the significant pick up in vol has made new issuance more attractive for companies and with the broader credit markets closed converts may be one of a few available financing sources. Interestingly, a number of the large multistrat HFs and others with converts expertise are adding capital to the space. It probably means it just a matter of time before the profits are arbed away and the capital looks for opportunities elsewhere.
Thanks, this is extremely helpful! Do you have any thoughts on how convertible arb funds (or convertibles groups in multi-strat funds) have done so far during the credit crisis? I know that conv arb as a strategy has performed quite poorly over the past few years, and I could imagine that the huge widening of credit spreads recently has caught some convertibles funds off-guard. (I know that theoretically they are supposed to hedge the credit risk out, but my understanding is that this is not always possible, and even if it is some funds sometimes choose to keep some credit exposure.) Also, I guess liquidity in convertibles probably dried up together with credit markets in general, which might also hurt some funds in this space...
Any insights on the above would be very much appreciated!
I don't actively follow the space because as you suggest it has underperformed for a number of years now. However, I do see some returns come across my desk and can make generalizations based on these. January was flat to negative and February was tough for guys who don't hedge credit. If the fund was a vol player, new issuance and increased vol provided some opportunities in the space. As you point out, there are many funds playing both the credit and vol, a trade that worked well coming out of the 2002 distressed cycle, but one that is less effective today. The reason for the lack of credit hedge may be due to the rising cost of shorting credit. CDS spreads have widened with the market making it more expensive to hedge and likely less profitable to set up an arb trade. Finding someone willing to take the long side of the CDS trade may be complicating the liquidity picture too. I don't have a good feel for the liquidity in the space but I would say that it is probably somewhat similar to that of high yield. The better credits are more liquid whereas the lower quality names are not.
It will be interesting to see if the recent new issuance continues and whether appetite will remain for the bonds. If multistrats reallocate a large number of $$$ to these opps the potential for returns will quickly diminish. However, given the perceived (and likely real) distressed opportunity set on the horizon, convert arb may remain under capitalized allowing for a more fertile opportunity set over the next few years.
hfguy is correct - the convert mkt is doing extremely well and still remains the most attractive mkt for new issuances.
Convertible Bond/Debt (Originally Posted: 09/14/2010)
Could someone who's done CB deals before shed some lights on the procedures of a CB transaction as well as information needed to structure a CB deal? Thanks.
Have worked in conjunction with redeemable preferred stock. The company was a large public with corporate debt in the most senior position. Most credit agreements require bank approval for this. I'm sure there is also an debenture with the details of the debt and rights of conversion.
Convertible Bond (Originally Posted: 05/07/2011)
Why would a convertible bond with a conversion to a preferred stock instead of an ordinary stock be a bad idea?
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assuming you have a public company, preferred stock isn't exactly liquid - makes realizing value harder, and thus the argument that convertible bond is a bond with upside gets muddled.
Also, if you have something that converts to preferred, why not just issue a new class of preferred that looks a lot like a convertible bond? (liquidation preference, fixed cumulative dividend, etc.)
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