Convertible Securities: A Complete Guide to Corporate Financing and Investment Strategies. 2022. Tracy V. Maitland, F. Barry Nelson, CFA, and Daniel G. Partlow. McGraw Hill.
Professionals considering investing in, hedging, or issuing investment grade or speculative convertible or preferred bonds in the public or private markets of North America, Europe, or Asia will find almost everything they need to know at Convertible Securities: A Complete Guide to Corporate Financing and Investment Strategies. Guidance on issues such as using convertibles to diversify a portfolio or to optimize a capital structure is meticulously supported by empirical data and expanded with case studies. If, on certain topics, readers desire more detail than even the book’s 560 pages could accommodate, they can track down useful references to material on the Advent Capital Management website, where Tracy V. Maitland, F. Barry Nelson, CFA and Daniel G. Partlow apply their experience in managing convertibles. In addition, the book explains the evolution of the asset class from its 19th century origins to the investment implications of the Tax Cuts and Jobs Act of 2017 and recent rule changes accounting for convertible issuers.
The authors address a wide audience. Lay investors can apply the basic financial theory, presented as background, to activities outside the confines of the convertible market. At the same time, the book presents quantitatively sophisticated valuation methods and trading strategies, invoking terms of the art that will be new even to many seasoned practitioners, for example, “ASCOT”, “zomma”, “nuking” and ” happy meal”. “
It behooves the reader to pay strict attention to the authors’ carefully studied wording at all times. Recalling its introduction to financial markets in the 1980s, Advent founder Tracy Maitland notes in her foreword “long-term returns on convertibles that were equivalent to returns on common stocks, but with significantly less risk.” . Bringing the story up to date in the main text, the authors state that “historical convertibles are back about as much as long-term common stock.” Careful to avoid exaggerating things, they write elsewhere: “Convertibles typically provide less volatility than stocks.” Equally circumspect is this comment: “The record for convertible indices essentially match the returns of equity indices over the decades can in part reflect the superior growth of convertible issuers relative to the growth of companies found in equity indices” (italics added to previous sentences). One message that comes through clearly is the asymmetric behavior of convertibles, which capture much of the upside in associated stocks while cushioning downside through the bond side of their nature.
Among many useful observations that are tangential to the main topic, two call for a little notation. First, the authors state that “because risk increases over time, long-term securities tend to have wider credit spreads than short-term securities.” Records from ICE Indices, LLC, confirm that, except from December 2007 through March 2009, the option-adjusted spread (OAS) on 10- to 15-year US investment-grade corporate bonds has consistently exceeded the OAS in 3 to 5 years. questions For high-yield bonds, however, the 3- to 5-year OEA has typically outperformed the 10- to 15-year OEA.
Second, the authors state that “entities that have the ability to print money are considered completely risk-free because, under any circumstances, they can pay their debt with currency that only they can create.” Indeed, control of a currency is a necessary but not sufficient condition for zero risk of default. History records a series of sovereign defaults on domestic currency-denominated debt, such as Russia’s 1998 default on its ruble-denominated debt. Also worth noting in this regard is the fact that the US Treasury only has a Standard & Poor’s rating of AA+, not the agency’s highest rating (AAA).
“Amortized” (out-of-the-money) convertibles represent another time-honored topic in fixed-income circles. Some bond sellers have promoted the belief that these issues are invariably neglected once they cease to interest convertible investors, resulting in offerings with yields higher than comparable straight (non-convertible) bond yields. Maitland, Nelson and Partlow judiciously state that convertibles at a discount price only “have the potential to significantly outperform non-convertible bonds” (italics added).
As with most books, there are some minor items Convertible Securities bear cleaning in a future edition. The book refers to the ICE BofA US High Yield Corporate Index by its former name, the “High Yield Master II Index.” Other editorial notes include mentions of the BlackRock “Alladin” fund, the “Capital Asset Pricing Model” and the “Discounted Dividend Model.”
These stylistic peccadilloes do not detract from the many delights that await readers Convertible Securities. One does not expect to discover in a heavy volume on finance the Latin antecedent of the saying, coined by Shakespeare, “It is Greek to me.” Equally coincidental is a Talmudic commentary on the symbolism of the Hebrew counterparts of the Greek letters gamma and delta. Most important, however, are the original research contributions that enrich the coverage of all aspects of the convertible ecosystem. York Capital Management CEO Jamie Dinan is right to call Convertible Securities an “extraordinarily comprehensive book”.
Full disclosure: The reviewer is mentioned in the acknowledgments of this book and in a note at the end.
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