Convertible notes: Why these assets are coming back into vogue in 2022

Friday the 13th saw the Australian market rebound after share prices were slashed repeatedly for most of the week.

The benchmark ASX 200 climbed 134.1 points (1.93%) to close at 7075.1, providing a brief reprieve from the bloodshed that plagued most of the week.

Even so, the market remains down for the year with major investment banks forecasting further downside pressure for the rest of the year, as investors contend with a new era of uncertainty and volatility.

Against this backdrop of inflation, war in Europe and rising interest rates, some market analysts are tipping convertible notes will find favour with investors looking to minimise their downside risk without losing out on upside potential.

What is a convertible note?

Convertible notes combine elements of both debt and equity instruments, and have proven a popular way for companies to raise capital, especially in the US.

These assets begin their life as a debt financing tool – investors receive fixed-income interest payments on the face value of the asset, over an agreed upon period, and can receive their full investment amount back at expiry.

This is where corporate bonds and convertible notes begin to differ, however, because convertible note holders can choose to ‘convert’ their debt into equity rather than recoup their initial investment in cash.

For companies, this represents a way to raise capital without immediately growing their registry, delaying any dilution to their shareholders.

For investors, these assets provide guaranteed fixed income with all the upside of an equity investment, and the downside protection of a bond.

Why do convertible notes make sense now?

Markets have had a rocky year, starting out on a downward trend before careening back into positive territory in late April before tumbling back down again.

Ongoing uncertainty stemming from Russia’s ongoing war in Ukraine has feed into investors fears of rising inflation and higher interest rates, driving a spike in volatility.

At the same time, companies have delivered robust earnings reports and the broader economic backdrop remains relatively strong – creating mixed signals that have left many investors scratching their heads.

Many investors have opted to move down the risk curve, sacrificing potential returns for the peace of mind that comes from ‘safer’ investments, while others argue strong opportunities remain in the market for those who can be selective with their portfolios.

With these prevailing market conditions expected to continue on for the foreseeable future, analysts at Schroders and Invesco believe convertible notes will have their moment in the sun, noting the vehicles outperformed equities during a tumultuous 2020. 

“Looking back and combining the stellar performance in 2020 with [2021], risk adjusted returns of convertibles since 2020 look convincing,” Schroders investment director for convertible bonds Martin Kuehle said.

“In the long term, the asset class has demonstrated its combination of downside protection and upside participation.”

Source: Schroders

With volatility returning to markets and shares dropping amid uncertainty, the two companies expect convertible notes’ defensive traits could deliver outperformance in 2022.

Wellnex Life offers new convertible note

With these factors currently shaping markets, we are opening a high-yielding wholesale investment opportunity with exposure to a secured convertible note with a 9% interest coupon per annum and attaching options on conversion. 

The convertible note is for Wellnex Life (ASX: WNX), an ASX-listed company with strong cash flow and an experienced management team.

Wellnex Life is a health and wellness company with ongoing agreements with the likes of GlaxoSmithKline, Chemist Warehouse, Priceline Pharmacy, Woolworths and Coles to develop, manufacture and supply innovative health and wellness products for retail shelves. 

The company has grown its revenue from $6.7 million (FY18) and expects to exceed $21 million at the end of FY22, while improving margins by moving towards in-house brands and products

Click here to request the Offer Documents.

Reach Corporate provides Corporate Advisory Services, including managing investor communications on behalf of Wellnex Life Limited and will receive fees for its services.


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