IG Corps turn to Convertible Bonds to lower financing costs

📍 A market that was generally intended for companies with below-investment-grade ratings is now also opening up to IG issuers. It is the case for convertible bonds, that can be exchanged with common stocks of the issuing company while paying a reduced coupon. Given the high interest rate environment, convertible bonds represent a cost-saving option also for companies with a better credit profile.

📍 According to Bank of America, more than $40 billion in convertible bonds were issued in the US this year, with investment-grade issuers accounting for $12 billion (around 30%), the biggest amount in at least a decade. These issuers sold only $2 billion (7%) of convertible bonds in 2022. The same pattern was observed in Europe. According to Mediobanca, €10 billion convertible bonds have been issued since the beginning of the year, with 27 percent of them issued by investment-grade companies.

📍 With average investment-grade bond yields approaching 6%, corporations in more stable industries such as utilities, real estate, and industrials are also resorting to the convertible market to reduce costs, while the technology sector accounts for less than a quarter of transactions. The situation is similar throughout Europe. In this market, too, the cross-section of issuers over the last year has seen many conventional sectors participate. Sectors such as auto, telecommunications, and food each account for 10% of the total, while financial issuers account for 17% and computer issuers account for 15%.

Source: Outlook – Repubblica