(Bloomberg) -- Convertible-bond investors predict a wave of new issuance ahead, according to a Bank of America Corp. poll that showed their expectations exceed the bank’s own estimates.
Bank of America’s survey of 31 convertible-bond portfolio managers earlier this month showed they expect global volumes to reach $132 billion this year — roughly 67% higher than last year and above the estimate range of $100 billion to $110 billion that comes from the bank’s strategists.
A few trends are driving those expectations, said Michael Youngworth, Bank of America’s head of global convertibles and preferred strategy.
First, high interest rates have made convertible bonds an attractive financing option for issuers, because they are less expensive than traditional debt. That has lured a broader range of companies into the mix, including investment-grade issuers and utility providers, in addition to the tech and biopharmaceutical firms that typically fill up the space.
Second, there has been a rotation into small-caps that parallels what’s been happening in the stock market. The ICE BofA Small Cap US Convertible Index is up 3.1% over the past month, compared with a mere 0.6% gain for large-cap counterparts, data compiled by Bloomberg show.
“If their stocks are higher, it usually opens a window for them to tap capital markets,” said Youngworth. “Investors may want new deals from smaller-cap companies to participate in that theme with a little bit more delta than a lot of the names they currently have.”
Lastly, a wave of pandemic-era debt issued in 2020 and 2021 is starting to come due, which is another positive sign for new issuance.
“It’s starting to reach that time where CFOs need to think about refinancing,” he said.
Bank of America strategists lifted their full-year estimate range by $10 billion because they expect strong issuance from the US and Asia excluding Japan to continue, building on momentum from the first half of 2024.
New convertible bonds have raised $73.2 billion so far this year, 9% more than the same period last year, according to data compiled by Bloomberg.
Bank of America’s poll found some bullish signs for pricing as well.
The convertible-bond managers surveyed expect the Federal Reserve to cut interest rates twice before year-end, due to softer-than-expected consumer price data in May and June. Their view is more robust than Bank of America’s prediction of just one cut in December. Lower rates would help convertible-bond performance, because riskier assets tend to do well when rates decline.
Also, 65% of those polled said they are holding only as much as 3% in cash — meaning many are fully invested.
“Cash levels are pretty low according to our investors, which we generally see a sign of bullishness,” Youngworth said.
--With assistance from Yiqin Shen.
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