From Niche to Mainstream: Convertible Bonds Surge as Credit Costs Bite
The last 12 months have seen a significant rise in convertible bond issuance. After a subdued period, 2023 saw a 77% jump in activity with total convertibles issuance reaching $48 billion. At Laz Partners, we expect this upswing to hold the potential to influence hiring needs across our client base, and expertise in convertible bonds becoming an in-demand capability in the coming year.
Debt Refinancing Drives Convertible Boom
A key factor driving the convertibles resurgence is the approaching debt maturity wall. US IG companies face a record $1.26 trillion in refinancing needs over the next five years, while their junk-rated counterparts grapple with $1.87 trillion. Convertible bonds traditionally offer lower borrowing costs vs traditional bonds without immediate shareholder dilution through stock offerings. Car-sharing giant Uber exemplifies this, having secured a $1.5 billion convertible at a sub-1% interest rate in Q4 2023, significantly lower than the current 5.2% average for IG bonds.
Beyond Traditional Users
Historically favored by young tech & biotech companies, convertibles are now attracting established players across sectors, a shift that reflects the convertibles’ increasing appeal in a rising rates environment where even IG borrowers face higher borrowing costs. Utility giants PG&E and Evergy’s recent participation in the convertible market is another example of its widening reach.
Impact on Credit Hiring
This market shift translates to potential talent gaps to cover this expertise. Hiring managers will likely prioritize candidates with:
• Deep understanding of convertible structures and valuation: Expertise in analyzing conversion premiums, equity upside potential & credit protection mechanisms
• Strong refinancing and restructuring skills: As companies optimize their debt portfolios, candidates adept at formulating refinancing strategies & incorporating convertibles will be highly sought-after
• Broader industry/sector knowledge: The expanding use of convertibles across sectors will mean a need for talent with sector knowledge beyond traditional tech & healthcare niches.
Outlook 2024
We expect the surge in convertible bonds not to be a short-term financial trend; it signals a shift within Credit with tangible implications for future talent needs.
