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Panel Detail:

Monday, April 27, 2009
4:00 PM - 5:15 PM

Convertible Securities in Today's Market

Moderator:

John Calamos Sr., Chairman, CEO and Chief Investment Officer, Calamos Asset Management

Convertible securities are not just for the weak — many healthy and well-respected companies are using convertible securities as a flexible and inexpensive way of accessing capital.

The panel agreed that convertible securities are more flexible than debt because they do not have as many restrictive covenants and allows companies to tap into funding even when debt spreads are high. Moderator John Calamos Sr. of Calamos Asset Management explained that the convertible securities market is "more resilient over time in providing access [to capital] to companies."

Companies access capital along a spectrum, with equity on one end as the most flexible but most expensive option, and debt on the other end as a relatively inexpensive but restrictive mechanism. Additionally, Calamos added that debt is not accessible to all firms: some are too small to raise a significant debt offering or have their debt rated. "Convertibles really provide the ability to enhance each part of the spectrum," Calamos explained, allowing companies to raise equity at a premium or issue debt with a higher yield.

Jason Lee of Goldman, Sachs & Co. added that convertible securities have also been very attractive because of their accounting treatment, although the panel agreed that the Financial Accounting Standards Board will soon take away that advantage.

The panel also addressed whether CFOs and investors really understand convertible securities. Michael O'Grady of Bank of America Merrill Lynch stated that CFOs may not start with a full understanding, but by the time they finish, they understand. Lee agreed. "The challenge of this asset class is educating those companies who don't get it," he said, noting that there are a large number of "classic American companies that still have a bit of a perverted perception about what this security is."

However, the panelists agreed that there is a great value proposition to investing in the convertible securities market once participants are educated. The speakers noted that this market has experienced a tremendous dislocation that has opened up a myriad of ways to invest in convertible securities.

Christopher Zafiriou, Senior Investment Analyst of the Investments of the Pew Charitable Trusts, stated that convertibles can be used in three common ways: as a means to invest in distressed securities, through convertible arbitrage and as a defensive equity substitute. Zafiriou did warn that he did not feel that convertible arbitrage is a long-term proposition; he believes it will eventually devolve to hedge funds trading among themselves. But he stated his belief that convertible securities offer an excellent risk/reward ratio and states that if an investor is "gun-shy about rebalancing into equity, then convertibles are a great way to transition."

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