U.S. issuance of convertible bonds in May hit a record high of $20.7 billion, according to Bank of America data, as companies struggling with the impact of the coronavirus pandemic ventured into the one-time niche market seeking cheaper and easier ways to borrow cash.
The convert market has also been a refuge for equity investors, said Joe Wysocki, who manages the long-only convertible fund at Calamos Investments.
Convertible debt is a hybrid security, offering a regular fixed payout like a bond, while giving bondholders the right to trade their debt for equity if shares rise over a certain price. Banks began pitching convertible deals early the pandemic, after plummeting stock values ground equity issuance to a halt. Since then the product has become the biggest source of fee growth for equity bankers, according to Refinitiv data. Convertibles have made up 34% of U.S. equity deals so far this year, up from 19% last year. The deals were seen as a solution for companies who needed cash but did not want to sell shares at lower valuations, bank sources said.
Desperation for cash, however, has led issuers to make some concessions. Conversion premiums - the amount the conversion price exceeds the current share price - have been falling, according to Wysocki.
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