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Convertible Securities: A Complete Guide to Corporate Financing and Investing Strategies. 2022. Tracy V. Maitland, F. Barry Nelson, CFA, and Daniel G. Partlow. McGraw Hill.
Professionals contemplating investing, hedging or issuing investment grade or speculative grade convertible bonds or preferred in the public or private market in North America, Europe or Asia will find almost everything they need to know at Convertible Securities: A Complete Guide to Corporate Financing and Investing Strategies. Pointers on issues such as using convertibles to diversify a portfolio or optimize a capital structure are meticulously backed by empirical data and augmented by case studies. If, on certain topics, readers want more detail than the book’s 560 pages can accommodate, they can consult the helpful references to the material on the Advent Capital Management website, where Tracy V Maitland, F. Barry Nelson, CFAY Daniel G. Partlow apply their experience in managing convertibles. In addition, the book chronicles 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 amendments to accounting standards for convertible issuers.
The authors address a wide audience. Lay investors can apply basic financial theory, presented by way of context, to activities far outside the confines of the convertible market. At the same time, the book introduces quantitatively sophisticated valuation methods and trading strategies, invoking terms of art that will be new even to many experienced practitioners, for example, “ASCOT”, “zomma”, “nuking” and “happy eating”. “
It behooves the reader to pay strict attention to the carefully considered wording by the authors at all times. Recalling their introduction to financial markets in the 1980s, Advent founder Tracy Maitland mentions in his preface “long-term returns on convertibles that were equivalent to returns on common stocks, but with significantly higher risk.” minor”. Updating the story in the main text, the authors state that “historically, convertibles have made a comeback about as much as long-term common stocks.” Careful not to overstate things, they write elsewhere: “Convertibles typically provide less volatility than stocks.” Equally circumspect is this comment: “The record for convertible indices essentially matching the returns of stock indices over the decades can in part reflect the outperformance of convertible issuers relative to the growth of companies found in stock indices” (italics added in previous sentences). One message that is clearly conveyed is the asymmetric behavior of convertibles, that they capture much of the upside potential of associated stocks while buffering the downside through the link side of their nature.
Among many useful observations that are tangential to the main topic, two require a bit of annotation. First, the authors state that “because risk increases with time, longer-dated securities tend to have wider credit spreads than shorter-dated securities.” Records from ICE Indices, LLC confirmed that, except for December 2007 through March 2009, the option-adjusted spread (OAS) on US investment-grade corporate bonds. However, for high yield bonds, the 3-5 year OEA has generally outperformed the 10-15 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.” In reality, control of a currency is a necessary but not sufficient condition for zero default risk. History records a number of sovereign defaults on local currency-denominated debt, such as Russia’s 1998 default on its ruble debt. Also, in this regard, it is worth noting that the US Treasury is rated by Standard & Poor’s at only AA+, not the agency’s highest rating (AAA).
“Broken” (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 be of interest to convertible investors and consequently become bargains with yields higher than plain (non-convertible) bond yields. comparable. Maitland, Nelson, and Partlow judiciously assert that convertibles traded at discounts to par simply “have the potential to significantly outperform non-convertible bonds” (italics added).
As with most books, some minor articles in convertible securities bear cleaning up in a future issue. The book refers to the ICE BofA US High Yield Corporate Index by its former name, “High Yield Master II Index.” Other editorial slips 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 of convertible securities. One does not expect to discover in a heavy tome on finance the Latin antecedent of the saying, coined by Shakespeare, “It’s Greek to me.” Similarly fortuitous is a Talmudic commentary on the symbolism of the Hebrew analogues 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 a “remarkably comprehensive book”.
Full disclosure: The reviewer is mentioned in the acknowledgments for this book and in an endnote.
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Publisher’s note: The bullet points in this article were chosen by the editors of Seeking Alpha.