Convertible Securities: A Complete Guide to Investment and Corporate Financing Strategies. 2022. Tracy W. Maitland, F. Barry Nelson, CFA, and Daniel G. Portlow. McGraw Hill.
Professionals planning to invest, hedge or issue investment grade or speculative grade convertible bonds or preferred bonds in the public or private markets in North America, Europe or Asia will find virtually everything they need to know in Convertible Securities: A Complete Guide to Investment and Corporate Financing Strategies. Indicators on issues such as using convertibles to diversify a portfolio or optimize capital structure are carefully backed up by empirical data and complemented by case studies. If readers want more information on certain topics than can be accommodated in even the book’s 560 pages, they can find convenient links to material on the Advent Capital Management website, where Tracy W. Maitland, F. Barry Nelson, CFAand Daniel G. Portlow apply your experience in driving convertibles. In addition, the book traces the evolution of the asset class from its origins in the 19th century to the investment implications of the Tax Cuts and Jobs Act of 2017 and recent changes in accounting standards for convertible issuers.
Authors address a wide audience. Lay investors can apply the basic financial theory presented as a reference to activities far beyond the convertible market. At the same time, the book presents quantitatively sophisticated valuation techniques and trading strategies using terms of art that will be new even to many experienced practitioners – such as “ASCOts”, “zomma”, “nuking” and “happy meal”. »
The reader is obliged to pay special attention to the carefully thought-out wording of the authors. Recalling his introduction to the financial markets in the 1980s, Advent founder Tracy Maitland mentions in his foreword “long-term returns from convertible shares that were equivalent to returns from ordinary shares, but with much less risk.” Updating the story in the main text, the authors state that “the convertible has made a historic comeback approximately as much as common stock in the long run.” Careful not to exaggerate, they write elsewhere: “Convertible usually provide less volatility than stocks.” No less cautious comment: “Record conversion indices essentially matching stock index returns over decades maybe partially reflect the best growth of convertible issuers relative to the growth of companies found in equity indices” (emphasis added in previous sentences). One clear message is the asymmetric behavior of convertible bonds, which capture much of the upside in their underlying stocks while mitigating shortfalls through the bond side.
Among the many useful observations bearing on the main theme, two require a little abstract. First, the authors argue that “because risk increases over time, long-dated securities tend to have wider credit spreads than short-dated securities.” Records from ICE Indices, LLC confirm that, except for the period from December 2007 to March 2009, the option-adjusted spread (OAS) on the 10-15 year investment grade US corporate bond has consistently exceeded the OAS on the 3-5 year questions. However, for high yield bonds, the 3-5 year OAS is usually higher than the 10-15 year OAS.
Second, the authors state that “entities that have the ability to print money are considered completely risk-free because they can, under any circumstances, repay their debt with a currency that only they can create.” In fact, currency control is a necessary but not sufficient condition for zero default risk. History has recorded a number of sovereign defaults on debts denominated in the national currency, such as Russia’s 1998 default on ruble debt. In this regard, it is also worth bearing in mind the fact that the US Treasury has a Standard & Poor’s rating of only AA+, not the agency’s highest rating (AAA).
“Broken” (no money) convertibles are another time-honored topic in fixed-income circles. Some bond traders have promoted the belief that these issues are invariably neglected once they cease to be of interest to convertible investors, resulting in trades with yields higher than comparable ordinary (non-convertible) bond yields. Maitland, Nelson and Partlow sensibly state that discount convertibles are simply “there is potential to significantly outperform non-convertible bonds” (emphasis added).
As with most books, there are a few minor elements Convertible securities bear cleaning in the next edition. The book refers to the ICE BofA US High Yield Corporate Index under its former name, the High Yield Master II Index. Other editorial notes include mentions of BlackRock’s “Alladin” fund, “Capital Asset Pricing Model” and “Discounted Dividend Model.”
These stylistic quirks do not detract from the many pleasures that await readers Convertible securities. No one expects to find in a weighty financial tome the Latin pre-Shakespeare saying, “To me it is Greek.” The Talmud’s commentary on the symbolism of the Hebrew analogues of the Greek letters gamma and delta is similarly coincidental. Most important, however, are the original studies that expand coverage of all aspects of the convertible ecosystem. York Capital Management CEO Jamie Dinan is right Convertible securities “a wonderfully complete book.”
Full disclosure: The reviewer is credited in this book’s acknowledgments and endnote.
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