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Crypto and Rates to Drive US Convertible Debt Growth in 2025
(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.
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.”
That said, in the event that Bitcoin retreats from its record-setting run, volatility can only take sales of additional convertible debt so far.
“We believe a pullback in crypto prices could put a damper on crypto issuance,” said Michael Gunner, a portfolio manager with Acasta Partners.
Duffield also predicted there would be more convertibles activity in health care and tech.
A more active M&A environment could open the door to more convertible share sales, with mandatory convertible stock offerings anticipated to be a part of such takeovers. The structure can also attract different companies to use the mechanism alongside traditional debt, bringing in a different group of would-be buyers.
“It provides equity credit for issuers unlike a convertible bond and it also appeals to income funds,” said Santosh Sreenivasan, global head of equity-linked capital markets at JPMorgan Chase & Co. “I expect 2025 to continue to be busy on that front.”
That’s not to say that the convertible bond market will be wide open. Sreenivasan is less bullish than some of his peers, positing that 2025 could bring in more than $50 billion from convertible issuance.
A question mark for some is the potential impact of President-elect Donald Trump’s policies when he returns to the White House in January. Michael Youngworth, Bank of America Corp.’s head of global convertibles and preferreds strategy, is optimistic about next year, and is banking on Trump’s campaign pledges to reduce regulation and cut taxes. The biggest downside risk is that they may not pan out, he said.
“It’s anyone’s guess as to what will happen with policy,” Youngworth said.
“Because of that, the tails of the distribution of outcomes for 2025 are particularly wide, which makes forecasting challenging,” he said.