Global companies are raising vast amounts of money through convertible bonds this year, as soaring stock markets lift demand for these bonds which give investors the option to change into equity shares at a later date.
Refinitiv data showed that companies have issued $19.7 billion worth of convertible bonds in the first seven weeks of 2021, the biggest in three years for comparable periods.
U.S. companies borrowed $8.6 billion in convertible bonds during this time, while Chinese firms issued $7.2 billion worth of bonds, the data showed.
Michael James, senior vice president at Wedbush Securities, said that while U.S. bond yields are rising, interest rates generally are still at historically low levels.
“It makes sense for many corporations to take advantage of this to raise capital for future uses,” he said.
“Convertibles represent a more attractive option for potential buyers because of the equity conversion option in a rising, ‘risk on’ equities market.”
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.
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.
Companies raised a record $190 billion through convertible bonds last year, compared with $126 billion in 2019, the data showed.
Frank Campana, portfolio manager at Insight Investment said the record convertible issuance in 2020 was due to companies in travel, leisure and airlines looking to raise liquidity and shore up their balance sheets as coronavirus curbs ground the global economy to a halt last year.
“We believe low rates, elevated volatility and issuance of conversion rights at a significant premium to current share prices will continue to lure companies to the convertible market in the near-term,” he said.
China’s convertible bond prices declined earlier this month on worries over regulatory scrutiny and tighter domestic cash conditions.
That drove the CSI convertible bond index to seven-month lows in the first week of February, but the index has since risen about 3%.