traded just like preferreds . Unlike bonds , they were quoted in dollars rather than percentages of par , their par value was $ 25 rather than $ 1,000 and their interest distributions went ex ( just like dividends ) rather than being included as accrued income ( which is not included in quoted bond prices , but is included in settlements of trades ). The resultant confusion may be why the structure was not repeated .
As GM shares declined prior to the bankruptcy , some holders of GM common stock sold their shares to obtain a tax loss , and they bought the GM convertible bonds to maintain participation in a hoped-for recovery , while obtaining some downside protection . Assuming the IRS accepted that the convertibles materially differed from the common stock , such a swap created a tax loss on the common shares without triggering a wash sale . Ultimately , the 2009 GM bankruptcy sent the common stock to zero while the convertible bonds apparently obtained some equity in the reorganized General Motors .
The new issue market for convertible securities has essentially been continuous since the 1980s , except for cessations during temporarily depressed markets .
The highlight of 1990s issuance was the dramatic increase in technology issues in the latter half of the decade — driven by enthusiasm for the Internet and the soaring dot-com stocks of the “ new economy .”
Amazon and Apple may have survived because of capital from the timely issuance of convertibles . Amazon ’ s early years were marked by negative cash flow , and Amazon issued three convertible bonds in 1998 – 2000 that raised $ 1.575 billion plus € 690 million . In 1996 , Apple had been burning cash after 11 years without founder Steve Jobs , and the company issued a $ 661 million convertible bond , followed by a $ 150 million private convertible preferred that was negotiated with Microsoft in 1997 when Jobs returned to Apple .
Berkshire Hathaway took advantage of market desire for quality in 2002 when it issued an AAA-rated convertible bond on unique terms that created a negative yieldto-maturity of – 0.75 %. Holders of the $ 10,000 par five-year bond were rewarded as Berkshire shares appreciated more than 40 % for an ultimate conversion value of about $ 14,120 . From 2008 – 2013 , Berkshire negotiated private convertible preferreds to invest $ 24 billion plus CHF3 billion in six large corporations .
Private securities have grown dramatically in the late 20th century and in the current century . Private convertibles often are issued by start-up companies and frequently are convertible preferreds , rather than bonds . In March 2024 , the Public Investment Fund in Saudi Arabia injected $ 1 billion into the start-up electric vehicle manufacturer Lucid via a private convertible preferred .
Growth Into the 21st Century
Issuance of convertibles temporarily ceased during the credit panic that followed the collapse of Lehman Brothers in September 2008 , when many convertibles were held by over-leveraged hedge funds that were forced to sell by margin calls and shareholder redemptions . But convertibles began to recover in November 2008 , and issuance quickly resumed in 2009 as numerous companies that had suffered during the Global Financial Crisis issued convertibles to replenish capital .
Convertible issuance suffered another brief cessation with the onset of the COVID- 19 pandemic early in 2020 . But the convertible new issue market reopened that April with a $ 1.95 billion issue by Carnival Corp ., and many more convertibles followed — especially issues by consumer companies that had been depressed by the pandemic .
2020 was the most spectacular year in recent convertible history . The first quarter saw the S & P plunge – 19.6 %, while the ICE BofA All-Convertibles Index ( VXA0 ) lost – 13.6 %. But a quick recovery in the stocks of technology companies and other convertible issuers led to the VXA0 besting all major US stock indices with a return of + 46.2 % for 2020 as a whole , while the S & P 500 returned + 18.4 %.
Throughout the history of convertible securities , the key to equity-like returns has been the inherent asymmetry of convertible bonds that provide downside protection yet also participate in the upside of the underlying stocks — as demonstrated by the returns in 2020 . Another constant has been that no matter how large the convertible market becomes , convertibles remain a niche asset class with consequent inefficiencies and opportunities for both investors and issuers .
The size of the convertible market was guesswork prior to the development of computer databases . We do know that as recently as 1989 , the US convertible market was only $ 50 billion . As of yearend 2023 , the US market had grown to $ 290 billion , with the global convertible market $ 467 billion .
Tracy V . Maitland is the founder , president and chief investment officer of Advent Capital Management , which manages over $ 8 billion , primarily in convertible securities . Prior to founding Advent in 1995 , he was a director in the convertible securities department at Merrill Lynch , where he introduced convertibles to major institutional investors worldwide .
F . Barry Nelson , CFA , is a partner of Advent Capital Management who serves as a senior advisor and was a portfolio manager before he retired . Prior to joining Advent in 1996 , he was the lead manager of the Value Line Convertible Fund .
Daniel G . Partlow is a managing director and the chief risk officer of Advent Capital Management . Prior to joining Advent in 2011 , he was the chief risk officer of Stanfield Capital Partners .
This article is primarily excerpted from Convertible Securities : A Complete Guide to Investment and Corporate Financing Strategies by Tracy V . Maitland , F . Barry Nelson and Daniel G . Partlow ( McGraw Hill April 2022 ), copyright © 2022 Advent Capital Management LLC . Used by arrangement with the publisher . All rights reserved .
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Geisst , Charles R . A History of Wall Street . New York : Oxford University Press . 2018 .
Graham , Benjamin , David L . Dodd and Sidney Cottle . Security Analysis : Principles and Technique . New York : McGraw-Hill . 1962 .
Holbrook , Stewart H . The Story of American Railroads . New York : Crown Publishers . 1947 .
Hungerford , Edward . The Story of the Rome , Watertown and Ogdensburgh Railroad . New York : Robert M . McBride & Company . 1922 .
Poensgen , Otto H . The Valuation of Convertible Bonds . Massachusetts Institute of Technology . 1965 .
Thoma , Beat . “ Convertible Bonds : Key Lessons From 150 Years of Issuance .” Investments & Pensions Europe . April 2015 .
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