Convertible bond issues surge in coronavirus-hit market

[LONDON] The volume of convertible bond sales has reached its highest levels since 2007 this year as companies rush to raise cash to see them through the economic impact of Covid-19.

Some US$89 billion of bonds that give the investor an option to convert into shares have been issued in 2020, according to Refinitiv data. Sales are mostly in the United States, although European issuance is growing as coronavirus lockdowns end and companies look to shore up their balance sheets.

The surge is a contrast to the 2008 financial crisis, when the market for convertible bonds collapsed as bets by hedge funds on low or unrated companies turned sour.

"When the crisis first kicked off, many companies were looking to raise capital and liquidity. And when the equity markets and debt markets were shut, the (convertibles) market remained open," said Virginie de Grivel Nigam, head of equity-linked for Europe, Middle East and Africa at JP Morgan.

Ms de Grivel Nigam has helped manage convertible bond sales for Germany's HelloFresh, Spanish travel-booking group Amadeus, and British online supermarket Ocado.

Convertible bonds are an alternative to equity placements and bond issues, and allow companies with low or no credit ratings easier access to cash than a regular bond issue.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

Investors are more likely to buy convertible bonds from such companies because they offer the prospect of equity gains while still paying a coupon and with their principal repaid at maturity if the option to convert into shares is not exercised.

CRISIS HIT

Convertible bonds took a massive hit during the last crisis - the market capitalisation of the global Thomson Reuters Convertible Index more than halved between May 2008 and March 2009 - and the market took years to recover.

Bankers and investors say that partly reflected the large market share held by hedge funds - around two-thirds of convertible bond investors in 2008, according to Jasper van Ingen, senior manager, convertible bonds at NN Investment Partners - and was exacerbated by lack of liquidity.

Institutional investors had put money into convertible bond hedge funds following the dot com crash in 2000 as they tried to diversify away from traditional stocks and bonds.

Now, hedge funds make up 20-25 per cent, and the remaining 75-80 per cent of the market are less leveraged participants, such as long-only investors, insurance companies, asset managers and mutual funds, Mr van Ingen said. He predicted the global convertibles market could grow by US$80-100 billion this year compared with 2019.

"We are not as busy as they have been in the US, which has been crazy, but the pipeline is developing nicely," said Thierry Petit, head of equity-linked at BNP Paribas. About US$12 billion of convertibles have been sold in Europe year-to-date.

Mr Petit pointed to the relative resilience of the convertible bond market this time round: the Thomson Reuters global US dollar convertible bond index recovered quickly from the March market rout and is at a 2020 high.

RISKS REMAIN

A large proportion of the convertibles market is unrated, and many new investors are coming in from fixed income and equity, said Mr Petit.

"We'll have to wait and see whether the buyers of this dip were the clever ones or did they catch a falling knife," said Mr van Ingen.

REUTERS