(Bloomberg) -- The US stock market’s August whipsaw has convertible bond issuers hiding, and that’s likely to continue into September with the movement of interest rates still up in the air.
Only $2 billion worth of new notes have been issued so far this month in the US, a far cry from the $7.6 billion raised during the same period last year, according to data compiled by Bloomberg.
The slowdown comes as a spate of mixed economic data has confused the market. Signs of a softening economy earlier this month led to the S&P 500 Index’s heaviest selloff in recent years. It also send the Cboe Volatility Index, or VIX, soaring to levels not seen since the pandemic. But that was countered by last week’s data showing consumer resilience and falling inflation, which triggered the best week for stocks this year and brought the VIX back down to where it was before the chaos started.
“We’ve completely reversed a lot of market volatility in a very short period of time,” said Michael Voris, global head of convertible bond financing at Goldman Sachs Group Inc.
Equity traders are now eagerly awaiting Federal Reserve Chair Jerome Powell’s speech in Jackson Hole on Friday for guidance on the timing and scope of the central bank’s anticipated rate-cut cycle. But convertible bond issuers and investors will likely be glued to their screens well beyond that for further confirmation of the economy’s health.
“An initial rate cut should be positive,” Voris said in an interview. “What’s really going to be a driver of sentiment is going to be the belief that the Fed has dealt with inflation in a way that leads them to continue to moderate interest rates in coming quarters.”
The window for issuing convertible bonds is particularly narrow this year, with November and December in particular up in the air because of the potential for presidential election volatility. And with this month’s wild market swings still fresh in their minds, some issuers may also want an all-clear sign from the Fed’s meeting, which wraps up on Sept. 18, further tightening the issuance time frame.
Falling Short
There has been $43 billion in new US convertible issues this year, according to data compiled by Bloomberg, putting it on track to outpace the nearly $56 billion raised in all of 2023. However, the full-year volume may fall short of the $100 billion that had been expected in light of August’s slowdown, Goldman’s Voris said.
Already, recent market jitters are causing a bifurcation among potential convertibles issuers, largely depending on their credit ratings and the resulting interest savings.
“Some of the investment-grade issuers are observing from the sidelines because savings from convertibles versus straight debt have compressed,” said Syed Raj Imteaz, head of convertible and equity derivatives advisory at ICR Capital LLC. “On the other hand, lower-rated issuers have been more proactive in considering the convertible market given the volatility they have seen in their stock price.”
Michael Gunner, a portfolio manager with Acasta Partners, is optimistic. “In our view, the market is still in for a significant amount of new convertible issuance,” he said.
For example, three digital asset miners — Core Scientific Inc., Bitdeer Technologies Group and Marathon Digital Holdings — raised a combined $800 million last week when the VIX, the market’s fear gauge, quickly receded below 20 from an intraday high of almost 66 and stocks kept climbing.
Going forward, volume is likely driven by the more than $100 billion worth of US convertible bonds that are coming due through 2026, since they’re often refinanced with new convertible bonds. And it could get a boost from continued issuance from rated and non-rated companies alike, as the Fed starts reducing rates but the interest-saving proposition holds.
“Seventy-five or 150 basis points of rate cuts over the course of the next year and a half isn’t enough to erode convertibles’ attractiveness over straight debt,” Goldman’s Voris said. “But it certainly puts them closer.”
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