The convertible bond market is shrinking. So why is Nomura Securities International jumping in?
Nomura estimates there is approximately $485 billion of convertible debt outstanding, roughly half of it in the U.S. But issuance has been in a slump since the financial crisis, and the firm expects that 30% of the current market could be lost to redemptions by 2012.
Nevertheless, Nomura, already a player in Japan, wants to be able to provide its clients with a global perspective and the ability to transact seamlessly across all regions.
Initially, at least, the firm is staking out a niche in the secondary, rather than primary U.S. market. David Puritz, hired in March as U.S. head of convertible bonds, did just that in his former post at Deutsche Bank.
Liquidity has been reduced as many of the convertible arbitrage hedge funds that once dominated the market have suffered outflows or closed in the wake of the financial crisis. The "long-only" investors that have replaced them generally don't trade as frequently. But Puritz said this creates opportunity for skilled traders and salespeople.
The fact that Nomura doesn't underwrite convertible bonds in the U.S. just means the firm's sales and trading team has an incentive to work harder to make a market, Puritz said. He said the sales force "covers" nearly every important hedge fund in the U.S.
The Japanese banking firm wants to be among the top three players in U.S. secondary market in a relatively short period of time. "We did it before" at Deutsche Bank, he said. "We think we can do it here."
The group has already made some inroads to the specialized secondary convertibles market. It traded approximately 5% of the total FINRA TRACE volume from April to July and approximately 6% of the volume in July. By way of comparison, Puritz says the top player has a market share in the low double digits.
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