Equity-linked dealmaking is progressing faster than last year, but there is a belief among advisers that corporates could make better use of the product in a rising rates environment.
While volumes could be worse, advisers are hoping for more issuance in the coming weeks. Until recently, the corporate earnings blackout was partly to blame for the lack of deals, but market sources say issuers will lose an opportunity if they do not make the most of a brief window ahead of the summer holiday season.
According to Dealogic data, the first three months of 2023 saw the highest equity-linked issuance seen so far this year, with deal value reaching peaks of USD 1bn-2bn. But then issuance levels lowered increasingly below the billion-dollar mark.
“I honestly expected to see more deals at this stage, in these market conditions you would think issuers would tap into it more,” said one ECM banker. He added that certain stocks are doing well and have strong valuations, and with equities volatile converts are usually an attractive product to refinance debt.
Year-to-date deal volume is around USD 7.3bn, according to Dealogic, far higher than 2022’s USD 2bn deal value for the same period but well below previous years, when CB issuance in EMEA was above USD 16bn YTD in 2021.
Consultant and CB expert Ivan Nikolov put this figure in context by referring to the record levels seen post-pandemic, but he noted that issuance is less than what is typically consistent with rising rates and a tightening credit environment.
Still, so far investors have been presented with several opportunistic refinancing deals from speculative-grade borrowers such as Delivery Hero [FRA:DHER], which in February printed a EUR 1bn 3.25% 2030 convertible bond. Other deals included a wildly popular EUR 400m debut CB from SPIE [EPA:SPIE] and a EUR 1bn CB from Rheinmetall [ETR:RHM], which were followed by similar moves from the likes of Neoen [EPA:NEOEN], Wendel SE [EPA:MF], Nordex [ETR:NDX1] and Swiss Prime Site [SWX:SPSN].
Reflecting on the deal track record so far, Tyrus Capital convertibles portfolio manager Damien Regnier said 2023 is an interesting year for the class, noting the issuer landscape is naturally tilted toward mid-to-large cap companies as opposed to mega-caps, as they were the first to be impacted by the economic slowdown.
Regnier highlighted the return of coupons on higher-quality issuance.
“For years the low interest rate had limited the appeal of our market for those quality issuers, but finally we are starting to see 2-3% coupons paid on IG credit,” he said, adding that it is excellent news for institutional investors, particularly pension schemes and insurance companies with minimum return requirements.
In addition, corporates are less driven by volatility as in the past, when growth companies used the zero-coupon environment to sell expensive underlying vol, said Davide Basile, partner and head of the convertibles team at Redhweel. It is now more of a traditional corporate finance decision owing to the uplift in the cost of debt, he explained.
The best is yet to come, sources hope, with H2 likely to bring a wave of refinancing and M&A-related activity, and inflation keeping interest rates stubbornly high.
A CB revival could be on its way.
Analytics by Raj Saiya
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