Listed companies are selling bonds that can be converted into stocks at a record pace this year, with nearly a third of those issuers paying nothing in interest as they seek to take advantage of low rates and voracious appetites for investors. investors for fast growing companies.

So far this year, 97 companies listed in the United States have issued convertible bonds worth $ 54.3 billion, according to Dealogic, a data provider. This is the highest volume since the start of the year – and 11% more than the amount raised so far in 2020, which has been a record year for convertible issuance.

Bankers and advisers say the pace of issuance has been rapid as fears of inflation and the possibility of rising interest rates have come to the minds of many investors.

Conditions are so good for companies that sell convertible debt that 28 of them pay no interest on the bonds, the highest number since 2001. The average interest coupon on convertible debt in 2021 is 1.41%, the lowest on record. On average, this year’s crop of issuers will only need to convert bonds to stocks if their share price increases by 39% typically within a five-year period, the highest conversion premium since 2003, according to Dealogic.

“These are the best terms in the history of the market,” said Vijay Culas, founder and CEO of Matthews South, which advises issuers on convertible debt offerings. “We’ve never seen anything like it.”

The pace of issuance also shows how optimistic many companies are about their business prospects and the future of the stock market. A rising market and strong trading performance would help corporate stocks meet their conversion target, wiping out debt and trading it for stocks as investors remain largely satisfied – despite some dilution – because their stocks have risen so much. .

Even with such a low cost of capital, companies often enter into derivative contracts in which they are willing to pay $ 10 million or more to protect against dilution if their shares exceed the conversion price.

The backdrop has been relatively ideal for many issuers, as investors have been eager to find all possible means in the fast growing tech companies, which make up a large portion of the companies issuing this debt. The terms for tech companies were even better, as they paid 0.31% on average in interest rates and had conversion premiums of 44%. Many companies that issue convertible debt securities are also those that have recently gone public, largely through traditional initial public offerings.

Issuing convertible debt is considered preferable to selling shares, because with a convertible issuance, companies would only issue shares later if their shares rose, and much of that dilution could be covered by these. contracts.

Serkan Savasoglu, Managing Director and Head of Global Equity Solutions at Morgan Stanley,

said many issuers this year have sold convertible bonds to raise funds as they see opportunities for acquisitions, business investments or share buybacks. “This year is more positive and optimistic and driven by confidence,” he said.

This contrasts with last year, where, especially in the first half of the year, as the coronavirus pandemic raged, many issuers were raising capital defensively. 2020 was a banner year for convertible bond issuance, with 186 companies issuing $ 111.2 billion. If 2021 stays on pace, it would easily eclipse last year.

Some of the best deal ever came in February and March before interest rates started to climb. In February, Expedia Group Inc.

issued $ 1 billion in coupon-free convertible debt with a so-called 72.5% conversion premium, meaning investors would only get shares if Expedia’s stock jumped that much. Expedia’s share has grown nearly 20% since then.


How long do you think the strong investor risk appetite will last? Join the conversation below.

Airbnb Inc.

issued $ 2 billion in convertible bonds in February with zero coupon and a 60% conversion premium. This was done in part to refinance the high-interest debt that Airbnb took on last year to withstand the pandemic.

Yet even though interest rates have climbed, activity remains robust. In the past week, four companies, including Coinbase Global Inc.,

have raised more than $ 2 billion in convertible debt. Coinbase went public in April via a direct listing and has not raised any new capital in the process. The company raised $ 1.25 billion in convertible bonds last week.

“Convertible debt was the most natural instrument due to the low dilution and speed to market,” Alesia Haas, chief financial officer of Coinbase, said in an interview.

Among the still small number of companies that have pursued direct listings instead of traditional IPOs, several have chosen to raise capital through convertible debt offerings, including Spotify Technology. HER

and Slack Technologies Inc.

Even with rates on the rise, industry watchers predict that companies, including those seeking direct listings, will continue to view the convertible bond market as a compelling alternative for investors who want another route into hot companies. .

“There is a large base of buyers who will keep things busy and a more diverse universe of issuing clients,” said Mr. Savasoglu of Morgan Stanley.

Write to Maureen Farrell at maureen.farrell@wsj.com

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