Historic plunge! 81 only fell below par, what happened?

Is the adjustment of the convertible bond market over?

Recently, the convertible bond market, especially low-priced convertible bonds, has seen a sharp correction, and the net value of many funds with heavy positions in convertible bonds has also been dragged down. Although the convertible bond market has rebounded in recent days, as of June 27, there are still 81 convertible bonds below par value, and the net value of some bond funds has failed to return to the previous high.

At the same time as the market adjustment, the views of institutions on the market outlook are also differentiated. Some institutions believe that risk factors such as credit rating downgrade and delisting of the underlying stock have not yet dissipated, and the risk of low-priced convertible bonds is still continuing, and they should be cautiously invested.

The convertible bond index erased the gains made last year

The convertible bond market was originally the most stable market this year, and recently under the influence of multiple factors, the performance gains of last year have been wiped out in just a few days.

The China Securities Convertible Bond Index hit a new high in May this year, and has continued to fluctuate since then, falling by more than 5% in the past month due to multiple factors, and all the gains this year have been erased. Despite the recent rebound, the CSI Convertible Bond Index still has a 0.43% year-to-date yield.

The Wind Convertible Low Price Index hit a record high this year, with a year-to-date yield of more than 5%, and the recent year-to-date gains have also been erased.

As of June 27, the Wind Convertible Bond Equal Rights Index extended its decline to 5.59% during the year.

In terms of the specific market, a total of 17 convertible bonds fell by more than 30% during the year, and 46 convertible bonds fell by more than 20% during the year, of which China Loading Transfer 2 and Guanghui Convertible Bonds fell by 67.88% and 46.98% respectively during the year.

According to Wind data, as of the close of trading on June 27, among the 530 convertible bonds being traded, the number of convertible bonds with the latest price below 100 yuan was as high as 81, accounting for about 15%, of which 2 convertible bonds were less than 50 yuan.

Multiple causes of stampede

The fixed income research team of Industrial Securities believes that the recent pressure of low-priced convertible bonds has fallen sharply, and this sharp decline rate should be at a historical level (even exceeding that of January-February 2021). From the perspective of attribution, a variety of factors have caused the phenomenon of indiscriminate selling of low-priced convertible bonds by some funds due to the adjustment of small and micro caps, the worries of credit rating downgrades, the worries of selling back pressure, the worries about the risk of delisting of underlying stocks, and the worries of capital stampede.

The recent adjustment of the convertible bond market, the Absolute Return Investment Department of the Golden Eagle Fund believes that it began with concerns about risk factors such as credit rating downgrades and annual report inquiries, and gradually spread to pessimism about the style of small and medium-cap stocks, and finally manifested as panic in the convertible bond market as a whole.

The reason for this is that the absolute return investment department of the Golden Eagle Fund believes that in the context of the short-term weakening of the stock market, the further improvement of the regulatory system and the relatively limited incremental liquidity, the divergence of funds on the pricing of convertible bonds is widening, resulting in the lower limit of convertible bond pricing in the short term or difficult to maintain.

Recently, low-priced convertible bonds have fallen significantly, and many high-YTM varieties have even fallen sharply below the bottom of the bonds. Gao Hui, fund manager of the mixed asset investment department of Bosera Fund, believes that on the one hand, due to the stricter supervision of delisting, the concern of individual stocks in the equity market continues to ferment. On the other hand, the macro economy is still in a state of weak recovery, the prosperity of many industries is declining, a small number of companies have high operating leverage, debt pressure is large, and the recent exchange has issued an inquiry letter on the abnormal financial indicators of the annual report, as well as the intensive adjustment of ratings by rating agencies, and the market has begun to deduce concerns about the credit risk of some individual bonds.

Changsheng Fund believes that the overall fluctuation of the convertible bond market that began last week is mainly due to the stock market correction and short-term capital disturbances. In addition, due to concerns about the adjustment of the tracking rating, some bonds have been under heavy selling pressure, and the sentiment has spread to the general decline of the whole market, and the AAA rating and other convertible bonds with good credit qualifications have also seen a pullback.

Du Guang, fund manager of Tianhong Fund, believes that this round of market pricing of individual bonds with ST risk, high convertible bond balance/positive stock market value ratio, and low credit qualification is sufficiently reasonable. However, the recent sharp decline in small-cap stocks, along with the fermentation of delisting risks, the rapid spread of panic, and even rumors, the market has begun to price small and medium-cap convertible bonds in disorder, which is obviously unreasonable.

The overall overshoot is expected to usher in a valuation repair

Can the convertible bond market recover quickly after a sharp correction?

"The credit risk of convertible bonds mainly includes the risk of debt repayment caused by the failure to pay principal and interest, the risk of delisting of the underlying stock and the risk of reorganization." Gao Hui recommends paying close attention to key information such as the exchange's letter of concern, inquiry letter, and the release of concerns by credit rating companies. Risk investigation can be carried out by paying attention to multiple dimensions such as operating conditions, financial indicators, changes in accounting errors in the previous period, corporate governance, the proportion of the balance of convertible bonds to the market value of the positive stock market, and the room for downward revision of convertible bonds.

The Absolute Return Investment Department of the Golden Eagle Fund believes that risk factors such as credit rating downgrades and delisting of underlying stocks have not yet dissipated, and risk control is still very important, and changes in risk appetite in the short-term convertible bond market still need to be observed.

The short-term volatility of the convertible bond market is still affected by many factors, but most institutions are still optimistic about the long-term allocation value.

Based on the asymmetry between the yield and risk of convertible bonds, when the market price is adjusted to a low level, the characteristics of convertible bonds "or losing time but not losing space" appear, and the funds on the left side will form an effective support for the market. The more the market is volatile, the more we must return to the first principle of investing in convertible bonds, that is, to obtain returns under the premise of controlling risks. In the medium term, the repair market of convertible bonds with investment value deserves positive attention.

Gao Hui expects that with the end of the exchange's inquiry and rating adjustment, the market will gradually stabilize, and will be combined with the game of downward revision clauses on the basis of strict control of credit risk to tap the opportunity of wrongdoing. In addition, in the low interest rate environment, the pattern of asset shortage continues, the current pure debt premium rate of the convertible bond market is not high, and the equity market is also in the bottom area, which has a good allocation value compared with credit bonds.

Looking ahead, Changsheng Fund believes that the tracking rating of individual convertible bonds may be downgraded, but the number is still controllable, and the substantive credit risk of most convertible bonds is not high. After the recent correction, the current valuation level of convertible bonds has been on the low side, with strong cost performance compared to pure bonds, and the bottom of the stock market is strongly supported.

A fund manager in South China believes that the recent adjustment of the convertible bond market has brought many convertible bonds to the value of the bottom of the bond. At present, the economic fundamentals continue to be in a moderate recovery trend, the policy of stabilizing growth has been further increased and gradually implemented, the trading volume of the Shanghai Composite Index has shrunk significantly around 3000, and the downward momentum has been basically released. After the recent panic decline, the overall pure debt premium rate of the convertible bond market has once again come to near the low level before the Spring Festival. Looking ahead, the convertible bond is currently in a relatively valuable position. There is usually a range between the rise and fall of convertible bonds, and there are often opportunities for allocation after adjustment.

"Although there are large fluctuations in the period of convertible bonds, in the long run, its Sharpe ratio is much higher than that of stock indices and stock-biased fund indexes." Du Guang believes that in addition to the investment cost performance brought by the innate debt protection, the demand for equity transfer and the limitation of the maturity period make the price catalyst have a strong urgency. This inherently price-to-value catalyst is that buying an undervalued convertible bond is fundamentally different from buying an undervalued stock. In view of the valuation analysis of the current market, Du Guang's view on the current convertible bond market is very positive, and the biggest opportunity may be in the small and medium-sized convertible bonds that have been mistakenly killed between 90 and 110, which is also the direction of its current active excavation.

On the whole, the fixed income research team of Industrial Securities believes that the resonance factor can be found in this round of low-priced coupons from the emotional side, but from the perspective of real feedback, it seriously deviates from the reasonable range, so it has the momentum to repair to a reasonable level. Similar to the small and micro market adjustment in February, the higher the degree of deviation from the short-term reasonable price, the greater the magnitude of the rebound, from the time dimension, the end of June is expected to be the most pessimistic time window.

Editor-in-charge: Wang Lulu

Proofreading: Gao Yuan