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Making a comeback
01 May 2009
Convertible bonds as an asset class had one of the worst years in their history in 2008. Many of the losses were attributed to forced selling by highly leveraged hedge funds and the proprietary trading desks of investment banks. But these instruments are poised for a comeback. Joseph Mariathasan reports.
Convertible bonds last year were faced with no choice but to
deleverage their portfolios with the ban of short selling, and
the seizing up of the credit markets cutting off their supply
of debt finance, whilst losses in other parts of their
businesses meant they had to reduce the size of their
positions. The nationalisation of the two US mortgage
providers, the Federal National Mortgage Association (Fannie
Mae) and the Federal Home Loan Mortgage Corporation (Freddie
Mac) and the bankruptcy of Lehman Brothers were particularly
significant as they were significant issuers and holders of
convertible preferred shares. The effective destruction of the
Fannie Mae and Freddie Mac convertibles together with the
losses stemming from Lehman securities was a catalyst for a
melt-down in the convertibles marketplace as a whole.
Before the deleveraging started in the summer of 2008,
convertible arbitrage had been seen as a reliable and very
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