(Bloomberg) -- The US convertible securities market could test its pandemic-era highs in 2025, bankers say, with interest rates remaining above where many on Wall Street expected and a crypto asset-related strategy that shows no sign of going away soon.
Most Read from Bloomberg
Equity-linked securities issued by American companies reached $81 billion in volume this year, a 46% increase on 2023 and the third highest in more than a decade, data compiled by Bloomberg show. Next year that figure should be somewhere between $70 billion and $90 billion, according to Richard Duffield, head of equity-linked capital markets at Citigroup Inc.
“We’re not going back to a zero interest rate environment any time soon,” Duffield said in an interview. Interest rates are anticipated to remain near where they are today, enticing companies to keep raising cash with lower cost convertible sales than regular-way debt.
While many companies have already taken advantage of buyers’ strong appetite by issuing new convertibles, there’s plenty more to soak up.
“During 2020 and 2021, there were more than $200 billion in converts issued,” said Josh Weismer, head of equity capital markets at Mizuho Americas. “Many of those deals need to get refinanced.”
Crypto Is a Driver
Crypto deals have been a major driver of convertible activity in 2024. Even though the year’s biggest single equity-linked transaction was a $5.75 billion mandatory convertible preferred stock offering from Boeing Co. — part of an immense deal to shore up its balance sheet — MicroStrategy Corp. has raised $6.2 billion this year through convertible bonds, inspiring several others to copy its strategy of issuing the securities to buy Bitcoin.
Several issuers in the crypto space have priced deals attractively, with some even declining to offer buyers a coupon. The better terms are driven by both increased volatility across equity markets as well as the simple fact that most benchmarks are at or near record highs, according to Citi’s Duffield.
Convertible bonds tend to attract hedge funds focused on arbitrage. With crypto firms specifically, funds buy the bonds and sell the shares short, as a bet on the underlying stock’s volatility. The more the stock swings, the more profitable the trade becomes.
“Volatility had been trending lower over the year, but in the past two months volatility has jumped back up,” he said. “The zero coupons you are seeing from the crypto companies are a result of the very elevated volatility in that sector specifically.”