Just curious if anyone has seen a decline in price for the convertible debt of the firms receiving the short sale protection from the SEC the other day?
Risk is like a bump in a Persian carpet, you can push it down in one place and it shows up in another. The SEC in making short sales difficult for some firms may have raised the cost of banks capital raising efforts thereby making things more difficult. The bump got pushed down the capital structure. A classic case of the law of un-intended consequences.
The theory
A lot of convertible preferred debt is delta neutral hedged with shorted shares. If people can't get the shares, the appetite for the Convertible preferred goes down. This decline in value shows up as a higher effective yield for the convertible preferred debt signaling higher risk. If a bank has to raise capital, the funders are certainly going to look to this market to take a que on how to price the debt.
This effect on currently issued convertibles may be less due to the fact they are deep in the money and thus may have low delta and gamma factors.
Newly issues convertibles would most likely have higher deltas and thus be more effected.
Just wondering what what people think about that. Where has the risk gone, now that shorting is more difficult, has it been pushed down the capital structure? I don't play in the convert arb game so I am interested in wiser people's feedback.
