Short-Sale Ban Wallops Convertible-Bond Market

The Securities and Exchange Commission's ban on short selling of financial stocks has effectively shut down much of the convertible-bond market, a crucial area of financing for struggling companies.

Convertible securities are essentially bonds that can be exchanged for stock in the future. It's a relatively small market with less than $400 billion in securities outstanding, according to market participants, a fraction of the total for investment-grade bonds. But in times of stress, struggling companies turn to convertibles in order to raise capital when a share price has fallen.

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"At the beginning of the year it was the 'convert' guys that provided the liquidity to all these institutions. Now the SEC is literally shutting the market down," says Adam Stern, chief executive at hedge-fund manager AM Investment Partners.

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"At least 75% of investors" in convertible securities hedge their positions, Elliot Bossen, chief investment officer of Chapel Hill, N.C., Silverback Asset Management, wrote in a letter to the SEC and lawmakers Wednesday. "This important source of capital will disappear entirely," if the rules remain in effect, he wrote, adding that the SEC's move "contributed to the seizing up of liquidity in the market for convertible securities."