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Pump Up The Vol: Convert Execs See Palatable Recovery

This article appears courtesy of Institutional Investor

Source: Corporate Financing Week


The convertible market will likely improve this year, giving issuers the option to raise capital at better terms than last year and investors more opportunities to make money, according to strategists and capital markets executives.

Equity volatility, a key factor driving liquidity because it gives arbitrage investors opportunities to trade convertibles, is expected to rise, according to a report by Lehman Brothers on Thursday. Uncertainties regarding the housing market, energy prices, economic growth, and a lack of market consensus on rates if the Federal Reserve slows its rate hikes, would all add to a pickup in volatility, said Venu Krishna , lead author, adding that as in any market, there are always risks of a return to poor fundamentals. He also pointed to the sizable difference between the current implied volatility in the S&P 500 Index and the 9-month implied volatility as evidence for a pickup.

"I expect issuance volumes to pick up this year as interest rates stabilize and volatility conditions improve," said Brooks Harris , head of convertibles at Deutsche Bank . He added issuance will also be driven by refinancings since a number of companies issued convertible s in the early 2000s.

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