October 2023 Quarterly InsightsCategory

Convertible Debt: Low-Cost Debt Capital in a High Interest Rate Environment

By Equity Capital Markets Team
1 min read

The convertible debt new issue market in 2023 has been frequented by companies seeking a lower cash interest alternative to what is being offered in the high yield and investment grade debt markets. Historically, convertible debt has been a common financing tool for high-growth businesses because it offers an attractive cost of capital relative to debt or equity, no financial covenants and an investor base supportive of general corporate purpose use of proceeds. About two-thirds of convertible transactions annually from 2020 to 2022 used proceeds for general corporate purposes or for M&A financing.

This trend has shifted in 2023 due to the high interest rate environment, with over two-thirds of issuers accessing the convertible market to refinance an upcoming debt maturity. To put the interest savings into perspective, the average coupon across the 40 refinancing transactions this year was 3%, which is significantly lower than the yield on Treasuries. This refinancing trend is being driven by a wider breadth of sectors and has also led to a significant increase in investment grade issuance. This year, the industrial, energy and real estate sectors account for 45% of issuance and investment grade has comprised 40% of total, whereas in 2021, the technology sector represented 52% of issuance volume and investment grade issuance comprised 6% of total. The upshot is that companies evaluating a refinancing or raising capital for general corporate purposes should consider convertible debt, given the expectations that interest rates will remain elevated, combined with a stable equity market backdrop and a broad community of convertible-dedicated investors looking for new investment opportunities.