Jefferies

Actionable Ideas for Companies and Sponsors

Issuers Turning to Convertible Issuance as a Preferred Source of Financing

Convertible issuance, up 70% year-to-date, is being driven by a perfect storm of rising interest rates, favorable equity valuations for issuers and robust investor demand. Convertible coupons are at or below 3-month LIBOR, offering the ability to earn interest income in excess of interest expense while waiting to deploy the capital. In fact, there have been 10 issuers year-to-date that have achieved coupons below 1%. In addition, as Fed rate increases leads to higher 3-month LIBOR (the benchmark for revolver and term loan interest rates), issuers have accelerated the use of convertibles to refinance floating rate debt and extend maturities. Finally, while issuance from growth oriented sectors, such as technology and healthcare, typically comprise approximately 50% of issuance volumes, we have seen a significant increase in activity from other sectors including financial, defense and energy. Issuance from these underweight sectors has scarcity value and has provided convertible investors with needed diversification.