US CB Market Attracts Money Amid High Interest Rates

"16 Trillion Won Issued So Far This Year"

As market interest rates have surged, causing borrowing costs to skyrocket, demand in the U.S. convertible bond (CB) market has exploded. Even high-quality companies are flocking to the CB market to reduce borrowing costs, which was previously a funding channel mainly for low-credit companies with weak financial structures.

According to Bank of America on the 25th (local time), the issuance volume of CBs by investment-grade companies has reached $12 billion (approximately 16.17 trillion KRW) so far this year. This accounts for more than 30% of the total CB issuance volume this year. A foreign media outlet reported that this is "the highest proportion in the past 10 years."

Jesse Mark, Global Head of Equity and Capital Markets at global investment bank Jefferies, said, "Even high-credit large corporations, which have mainly raised funds through bank loans or corporate bond issuance, are flocking to the CB market to reduce interest burdens."

CBs have characteristics of both bonds and stocks, allowing investors to earn bond interest income as well as capital gains from stock price increases. Due to this conversion right, companies can raise funds at lower interest rates compared to regular bonds. When CBs are converted into stocks, the amount to be repaid at maturity disappears, resulting in a dual benefit of reducing debt.

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), is holding a press conference after concluding the Federal Open Market Committee (FOMC) regular meeting on the 14th (local time) in Washington DC. [Image source=Yonhap News]

High-quality companies are also issuing CBs to lower borrowing costs that have risen due to high interest rates. As the U.S. Federal Reserve (Fed) sharply raised the benchmark interest rate, the annual interest rate burden for investment-grade companies has risen to an average of around 6%. The current U.S. benchmark interest rate is 5.25?5.5%, and the high interest rate environment in the 5% range is expected to continue until the end of next year.

Michael Youngworth, CB strategist at Bank of America Securities, said, "Even if companies with high credit ratings succeed in issuing corporate bonds, they have to bear high interest rates. Issuing CBs can lower the funding rate by an average of 2 to 3 percentage points."

In particular, the surge in investor demand for CBs due to rising stock prices is also increasing companies' demand for CB issuance.

As the high interest rate environment continues, the scale of CB issuance is expected to grow further. According to S&P, corporate bonds maturing between next year and 2026 are expected to reach $2.3 trillion.

This content was produced with the assistance of AI translation services.