A recent convertible security sold by
offers a good way to play the depressed shares of the media company, according to one veteran convertible investor.
“It looks pretty attractive,” says Tracy Maitland, founder and chief investment officer at Advent Capital Management, which runs about $11 billion mostly in convertibles, including the
Advent Convertible & Income
closed-end fund (ticker: AVK).
ViacomCBS shares have been hammered lately on sales related to the unwinding of a large position by Archegos Capital Management, and the convertible has been hit as well. ViacomCBS (VIAC) shares were off 6.7%, to $45, on Monday and are down more than 50% since March 19.
The $1billion, 5.75% mandatory convertible sold last week by ViacomCBS (VIACP) fell 3% Monday, to $65.34, and is down about 35% from its offering price of $100—marking one of the worst showings for any new convertible in the past decade.
Convertible securities normally offer considerable downside protection when stock prices fall, but the ViacomCBS deal is an exception because of a feature that results in the mandatory conversion of the securities into ViacomCBS common stock.
Maitland says the convertible now has a current yield of close to 9% and a conversion premium of about 21%. He views that combination as attractive relative to the stock, now yielding about 2%.
He contends that ViacomCBS stock could be worth $60 or more within a year, driven by the company’s push into streaming and the value of its media assets, including Paramount, Nickelodeon, and NFL football.
His view is that the convertible should offer better downside protection than the stock and similar upside, creating a favorable or “asymmetric” profile. Advent has bought the convertible after its big drop.
The typical convertible is a bond, which often has a four to six-year maturity, giving investors comfort that they will be repaid barring a default by the issuer. This gives traditional convertibles downside protection when the stock declines, while it offers upside if the equity rallies.
But the ViacomCBS convertible will automatically convert in three years into common stock based on a formula. Holders are likely to get roughly 1.18 shares of the stock assuming it trades under $85.
So-called mandatory convertibles are more like equity alternatives than true convertibles and have much higher yields because of the greater risk. Many recent convertible bonds have carried interest rates of zero. Issuers of mandatories include electric utilities. Credit-ratings firms tend to treat mandatories like equity rather than debt, which is how typical convertibles are evaluated.
Write to Andrew Bary at [email protected]