"Lower Procurement Costs" US Companies Rapidly Increase Convertible Bond Issuance

Last Year’s CB Issuance $48 Billion... 77% Increase YoY
3%P Lower Financing Rate Than Regular Corporate Bonds
CB Issuance Expected to Rise Again This Year

Amid soaring funding costs due to high interest rates, U.S. companies significantly increased their issuance of convertible bonds (CBs) last year. This is because CBs allow companies to raise funds at lower interest rates compared to regular corporate bonds, and many companies are expected to continue turning to the CB market this year.

According to financial information provider LSEG on the 2nd (local time), the scale of CB issuance by U.S. companies last year reached $48 billion (approximately 62.8 trillion KRW), marking a 77% increase compared to the same period the previous year. The amount of CB issuance has recovered to levels comparable to those before the COVID-19 pandemic in 2019.

The main reason for the increase in CB issuance by companies is the rise in borrowing costs. As the U.S. Federal Reserve (Fed) rapidly raised interest rates, companies have faced significant difficulties in repaying matured corporate bonds. Generally, companies repay existing debt through refinancing issuance, but with refinancing costs soaring due to interest rate hikes, they have turned to issuing CBs, which have relatively lower borrowing costs.

CBs are bonds issued by companies to raise funds, granting investors the right to convert them into the issuer’s stock. CB investors can exercise their conversion rights to gain profits if the stock price is higher than the conversion price, or they can choose not to convert and instead collect maturity interest if the stock price is lower than the conversion price. As a result, companies can issue CBs at lower interest rates than regular corporate bonds, making them a preferred funding method in a high-interest-rate environment. According to ICE Bank of America (BofA), the current average issuance rate for CBs is 5.2%, which is lower than the Fed’s benchmark interest rate (5.25?5.5%) and significantly lower than the average rate for speculative-grade corporate bonds (7.8%).

In fact, ride-sharing company Uber successfully issued $1.5 billion (approximately 1.96 trillion KRW) worth of CBs at a near 0% interest rate in November last year. Utility companies PG&E and Evergy recently issued CBs worth $1.9 billion (approximately 2.48 trillion KRW) and $1.2 billion (approximately 1.57 trillion KRW), respectively. Michael Youngworth, a CB strategist at BofA, analyzed, "CBs generally reduce borrowing costs by 2.5 to 3 percentage points," adding, "Uber could save tens of millions of dollars annually through this (CB issuance) deal."

Experts expect CB issuance to continue increasing this year. According to global credit rating agency Moody’s, the amount of debt that U.S. investment-grade companies will need to refinance over the next five years is estimated at $1.26 trillion (approximately 1,650 trillion KRW), a 12% increase compared to the past five years.

Ken Ballaha, co-head of global capital markets at law firm Simpson Thacher, predicted, "The popularity of the CB market will continue due to the enormous 'maturity wall' that is about to be reached."

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