Convertible Bond Market Overview
The convertible bond market has swelled to an impressive $700 billion. This growth reflects an increased popularity among corporations striving to manage interest expense and achieve investor diversification. The market has also experienced a sharp increase in investor demand. Amidst the volatility of 2023, convertible issuance volume has far surpassed that of 2022, demonstrating the market’s responsiveness to ever-evolving market conditions.
2023 Market Dynamics
U.S. companies have raised more than $40 billion in convertible bonds thus far in 2023 compared to $29 billion in 2022. This increase is attributable to a confluence of factors, with rising interest rates playing a pivotal role. The most prominent recent example is Uber’s $1.5 billion Convertible financing in November. The transaction was a convertible senior note offering with a maturity of 2028, a coupon of .875%, and an equity premium of 32.5%. In comparison, Uber’s 4.5% senior unsecured notes maturing in 2029 were trading at a yield of approximately 6.35% at pricing.
Other significant 2023 convertible bond financings include a $1.26bn transaction for the technology company Akamai and a $750mm offering by Shockwave Medical. The technology and healthcare sectors have historically been among the most active issuers in the convertible bond market.
Role of Rising Interest Rates
This surge in interest rates during 2023 has also driven increased convertible bond issuance. Corporate issuers have experienced sticker shock in evaluating the higher financing costs in the straight bond market, particularly in the high-yield market. With their lower coupons (albeit with an equity conversion option), convertible bonds have emerged as an essential financing tactic in a volatile environment.
2024: The 2024 convertible bond activity outlook appears promising, buoyed by a robust equity market rally and increased investor risk appetite. Industries undergoing rapid transformation or facing significant capital expenditure needs are the most likely candidates for convertible issuance.
Recent market rallies may have a mixed impact on 2024 convertible bond issuance. A potential slowdown of convertible issuance may emerge due to improved corporate borrowing rates available in the bond market. A likely offset, however, is that the equity market’s strength is likely to fuel issuance as high-growth borrowers become more willing to offer a conversion option to investors at elevated equity prices.
As the markets continue to improve, capital raising across all asset classes will likely increase meaningfully. Convertible bond issuance will be a crucial part of any upswing in capital markets activity as we turn the corner into 2024.
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