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MARKET INSIGHTS - Rising Potential of Convertible Bonds

Exploring a fixed income instrument features the combination of debt and equity: Convertible Bonds

High interest rates have increased borrowing costs for everybody and that includes companies looking to raise or refinance debt. That generates a renewed appetite for an of overlooked asset class called convertible bonds. Convertible bonds are what we call a hybrid instrument combining the features of a traditional corporate debt and common equity. Like corporate bonds, it guarantees income via interest of the initial investment but the reason they’re called convertible is because they offer investors the option to convert that bond to common stock when a company's share price hits a certain threshold. From the issuer’s side the convertible bonds have lower interest expense during the high interest rate periods. Convertibles are relatively less attractive with lower interest rates and accommodating capital markets for traditional alternatives. that’s why it lost market share from traditional corporate bonds over the last 15 years. However, considering the current outlook, the issuance of convertibles started to rise not for only the companies who can’t directly access the debt market because of their ratings, but also even for the companies with higher credit ratings. Through the report the common attributes of the convertibles and the risk-reward opportunities have been analyzed. Looking ahead we believe the convertibles market is poised for growth, and we will likely see more convertible issuances given a higher industry environment, tighter capital markets and a wall of maturities that is debt coming due in the next 2 to 3 years. Convertibles are a particularly suitable instrument in this context as they offer defensive income enhanced alternative to investing in the underlying common stock

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