Companies embrace convertible bonds amid rising interest rates
The market for convertible bonds, offering bondholders the option to convert to common stock, is experiencing a revival, attracting investors in light of changing financial landscapes. With convertible bonds generally maturing in five years and often issued by less creditworthy companies, their appeal has surged even among healthier firms due to higher interest rates.
Statistics show a significant upsurge in global convertible bond sales, with a substantial portion raised by U.S. companies boasting investment-grade ratings. The current landscape finds that issuing convertible bonds can save companies roughly 3 percent on interest payments compared to traditional corporate bonds. As interest rates climb, the attractiveness of convertible bonds in reducing debt payments grows more pronounced, spurring increased issuance.
The recent resurgence in the convertible bond market follows a lull in 2022, triggered by declining stock and bond prices and concerns over Fed interest rate hikes and a possible recession. As the economic landscape stabilized, companies are revisiting the strategy of recapitalizing or refinancing now rather than risking doing so during a recession.
Investors favor convertible bonds for their flexibility, serving either as fixed income or equity based on an issuer’s performance or investor portfolio needs. This adaptability, combined with the market’s comparatively higher liquidity, appeals to investors seeking dynamic investment options.
The current climate, especially with the entry point looking attractive due to stock pressure and potential growth profiles of smaller issuers, makes the convertible bond market an enticing opportunity. However, despite its appeal, it remains relatively less discussed in mainstream financial media, offering a unique and relatively unknown investment avenue for risk diversification and portfolio adjustments.