U.S. firms increasingly turn to convertible bonds amid rising interest rates

September 26, 2023 03:10 PM AEST | By Investing
Follow us on Google News:

In response to the Federal Reserve's aggressive interest rate hikes, top-tier U.S. companies are increasingly resorting to the convertible bond market to alleviate escalating borrowing costs. This year, investment-grade borrowers have issued $12 billion in convertible bonds, making up over a third of total issuance, according to Bank of America (NYSE:BAC)'s data. This marks the highest proportion in at least a decade and triples the average rate. In contrast, these highly-rated companies only issued $2 billion in such bonds in 2022, representing just 7% of the market.

Convertible bonds, which can be converted into equity when a company's share price hits a certain threshold, provide businesses an opportunity to secure funding at lower costs than traditional bonds without immediate dilution of their holdings through new stock sales. Historically, growth-oriented companies with positive long-term forecasts have dominated this market as a strategy to reduce short-term interest expenses.

Tech firms such as Airbnb (NASDAQ:ABNB), Peloton (NASDAQ:PTON) and Beyond Meat (NASDAQ:BYND) capitalized on the equity market surge in 2021 by using convertible bonds to borrow at zero per cent interest. Tech sector offerings made up over half of that year's total issuance. However, with average yields for investment-grade bonds nearing 6%, even entities in traditionally stable sectors like utilities, real estate and industrials are now turning to convertible bonds to maintain lower costs. Currently, tech-related deals represent less than a quarter of transactions.

In recent months, investment-grade companies including CenterPoint Energy (NYSE:CNP), Corporate Office Properties (NYSE:CDP) Trust and infrastructure investment group HASI have tapped into the convertible market. According to Michael Youngworth, BofA Securities' convertible bond strategist, these companies have managed to save between 2 to 3 percentage points on their interest rates compared to issuing conventional bonds.

Convertible bond issuance has picked up pace in recent months as more companies face refinancing deadlines and rising stock prices reduce the risk of diluting existing shareholders at low conversion prices. In September, firms raised $6.3 billion, following a $7.9 billion haul in August, setting the asset class on course for its busiest two-month period since 2021 in both dollar volume and number of deals.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

This article first appeared in Investing.com


The content, including but not limited to any articles, news, quotes, information, data, text, reports, ratings, opinions, images, photos, graphics, graphs, charts, animations and video (Content) is a service of Kalkine Media Pty Ltd (Kalkine Media, we or us), ACN 629 651 672 and is available for personal and non-commercial use only. The principal purpose of the Content is to educate and inform. The Content does not contain or imply any recommendation or opinion intended to influence your financial decisions and must not be relied upon by you as such. Some of the Content on this website may be sponsored/non-sponsored, as applicable, but is NOT a solicitation or recommendation to buy, sell or hold the stocks of the company(s) or engage in any investment activity under discussion. Kalkine Media is neither licensed nor qualified to provide investment advice through this platform. Users should make their own enquiries about any investments and Kalkine Media strongly suggests the users to seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice), as necessary. Kalkine Media hereby disclaims any and all the liabilities to any user for any direct, indirect, implied, punitive, special, incidental or other consequential damages arising from any use of the Content on this website, which is provided without warranties. The views expressed in the Content by the guests, if any, are their own and do not necessarily represent the views or opinions of Kalkine Media. Some of the images/music that may be used on this website are copyright to their respective owner(s). Kalkine Media does not claim ownership of any of the pictures displayed/music used on this website unless stated otherwise. The images/music that may be used on this website are taken from various sources on the internet, including paid subscriptions or are believed to be in public domain. We have used reasonable efforts to accredit the source wherever it was indicated as or found to be necessary.

Top ASX Listed Companies

We use cookies to ensure that we give you the best experience on our website. If you continue to use this site we will assume that you are happy with it. OK