Convertible bonds in Europe are back with a bang in the first few weeks of 2023 with the memories of a poor year last year being left behind by the product's return.
CB volumes so far in 2023 is the second-best start to a year in the last five, Dealogic data shows.
The USD 2.98bn of issuance YTD dwarfs the USD 1.2bn grossed by four deals during the same period last year and is better than the same period from 2017 through to 2020, when deal volumes never surpassed USD 2.7bn.
The volume so far this year is still below the same period in 2021, when an astonishing 17 deals were priced raising around USD 5bn.
Notably, this week was the pricing of a huge EUR 1bn transaction from Delivery Hero [FRA:DHER] which gave the issuer funds to tender existing paper and extend its maturity profile.
In early February, a EUR 1bn pair of convertible bonds from German arms manufacturer Rheinmetall [ETR:RHM] provided further hope for moves by potential issuers.
In Spain, media group Promotora de Informaciones (Prisa) [BME:PRS] also priced a EUR 130m convertible note earlier this year.
The deals have given hope to the market that good times have arrived.
“2022 was a poor year for issuance and there should be plenty of deals in the pipeline. With higher yields across the credit spectrum, corporates can get valuable coupon savings by issuing convertibles,” said Ivan Nikolov, a consultant and convertible bond expert. “We’ve already seen increased activity so far in 2023 and this should continue, especially if equity markets hold up and there are no negative macro surprises,”
Various catalysts could trigger issuance in the coming months, but M&A more than others could fuel new deals, said Stephanie Zwick, the head of convertible bonds at Fisch Asset Management.
As inflation lessens, smaller cap companies are expected to start outperforming larger players, with converts being a possible instrument to power growth, she added.
Her portfolio positioning is focused on convex convertible profiles, preferring to maintain underweight in credit exposure as there might be more pressure coming from spreads in case of a recession, she said.
Besides, the firm likes companies that have more recession resilient business profiles, or names that could profit from either a special catalyst, such as M&A, which are uncorrelated from economic environment or which are profiting from secular tail winds such as energy transition or digitalisation, she added.
Growth stocks are on the radar of David Basile, a partner at Redwheel, who said they offer a balanced profile, and in most cases, provide positive yields.
“There is a paid-to-wait dynamic for much longer-term optionality, which makes investing in the sector via convertibles particularly attractive,” he said.
The positive financing environment led Delivery Hero to refinance bonds maturing in 2024 and 2025 and other issuers might be tempted to do the same.
This positive attitude stretches well beyond Q1. Another investor said 2023 was on track to be a good year to pave an even better 2024, when activity could see a larger uptick because of a refinancing wall of Covid debt in 2025.
The good times might be here to stay.
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