In a recent article, the FT notes that "US companies have been piling into the market for convertible bonds as they search for ways to keep interest costs down, in a rare flurry of activity in otherwise subdued corporate fundraising markets." The article cites data from LSEG that the issuance of convertible debt climbed to $48 billion in 2023, an increase of 77 per cent compared to 2022.
Convertible bonds have historically been favored products in the life sciences and tech sectors, but companies in other sectors have been drawn to them as interest rates have increased. With significant debt coming due in the next couple of years, we likely will see issuers across many sectors turning to convertible bonds to replace non-convertible debt and lower their interest costs.
Issuers considering offering convertible bonds should discuss with their legal, accounting and financial advisors the following process points, among others:
- Advantages and disadvantages of a Rule 144A offering vs an SEC-registered offering.
- Accounting, reporting and tax implications of issuing convertible bonds.
- Ensuring that bond terms provide operational flexibility to pursue strategic transactions, such as acquisitions, dispositions and recapitalizations.
- Evaluating potential concurrent transactions, including share repurchase programs and derivative transactions, such as call spreads or capped calls, with a focus on implications for dilution, earnings, liquidity and termination in connection with a change of control or bond buyback.
Convertible bonds are special products in that they combine various elements of both equity and debt securities and have many unique deal terms relating to investor conversion and call rights, company redemption rights and settlement structures.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.