By Pablo Mayo Cerqueiro and Chiara Elisei
LONDON (Reuters) - European firms are selling debt that can be converted into their own shares at an unrelenting pace, as they seek shelter from the fastest escalation in interest rates by major central banks since the 1980s.
After borrowing heavily during years of rock-bottom interest rates, businesses are feeling the pinch of rising debt costs and some are turning to convertible bonds - a form of junior debt that can be converted into a company's equity.
Convertibles can offer corporations cheaper funding but risk diluting earnings and tilting the balance of power among shareholders if investors invoke their conversion rights.
These "bonds with a twist", as fund manager Schroders once put it, have historically been associated with companies that may lack other sources of funding and were perceived by some as an "admission of weakness".
But in the current environment, this kind of cheaper financing is increasingly popular among traditional bond issuers too.
Since January, companies in Europe, the Middle East and Africa (EMEA) have raised $2.9 billion through seven convertible deals, significantly above this time last year and higher than levels seen before the COVID-19 pandemic, according to Dealogic data.
The region is also slightly ahead of the United States in terms of capital raised via convertible bonds, something that market participants describe as rare, illustrating the strong appetite from companies on this side of the Atlantic.
"Issuance in Europe was extremely low last year. But a lot of issuers are now looking at convertible bonds to reduce their financing costs, as they face upcoming debt maturities," said Stephanie Zwick, Head of Convertible Bonds at Fisch Asset Management, which oversees more than 4 billion Swiss francs ($4.34 billion) in convertible debt.
Graphic: EMEA Convertible Bond Proceeds Year to Date: 2019-23 https://www.reuters.com/graphics/EUROPE-CONVERTIBLE%20BONDS/lbvggbaaqvq/chart.png
Corporate debt issuance dried up in the market turmoil following Russia's invasion of Ukraine, but momentum for equity-linked deals – as the asset class is also known – started to pick up in the latter part of 2022 and has carried into the new year.
Repeat issuers like Germany-based food delivery group Delivery Hero have come to market to refinance maturing deals, but there are also new names, like French industrials company Spie.
While tighter central bank policy has forced companies to bump up interest payments on new convertibles, the average coupon is still about half that paid in the junk, or sub-investment grade, bond market, according to market participants.