RWC Partners is launching a Distressed Convertibles fund to take advantage of extraordinary values in the market owing to forced selling.
The fund will lock investors in for two years because of its illiquidity. However, Dan Mannix, the head of sales at the firm, says there is huge embedded value in the asset class as long as investors can remain invested for this time horizon.
“Convertible bonds have performed particularly badly recently because of significant redemptions in the hedge fund world,” says Mannix. “Convertibles are now trading well below bond floors and the equity option is effectively valued at nothing. This is an unusual opportunity, a real illiquidity anomaly because of the forced sellers in the market.”
Convertible bonds are bonds that can be converted into shares of the issuing company at a pre-arranged value, therefore they have characteristics of both equities and fixed- interest products. Mannix says they can provide between 60% and 70% of the upside of equities with only 30% of the downside. He adds that owing to the extreme selling pressure on convertibles, made worse by the collapse of Lehman Brothers, they are now at their cheapest compared to other risk assets, even after sharp falls in equities and credit are factored in.
“In a low-growth environment, where dividends may be cut, convertibles are a compelling alternative to equities,” he says. “They are not subject to the same dilution risks and rank higher on the capital structure in the event of default.”
RWC already has a Global Convertibles fund, run by Miles Geldard. Gellard joined in September 2006 from JP Morgan, where he was head of the convertible bonds team. RWC’s global vehicle was launched in January 2007 and now has assets under management of £300m.
The Distressed Convertibles fund, to be launched on January 29, will aim to exploit illiquidity in areas of the convertible bond market that have been heavily sold down.
He adds that Geldard has built up considerable expertise in Asian convertible bond investing and the fund is likely to have a bias towards this area.