The convertible debt sold by high-flying American groups falls to Earth

Investors have been shaken by a slide in the price of convertible bonds issued at the top of the market this year, as fears of higher inflation have pushed interest rates towards each other and hurt them. the value of the debt.

Marketing technology groups such as Twitter, Peloton and Airbnb have taken advantage of the hot demand to issue convertible links just before sentiment changed. Convertible bonds are sold as debt, but can be exchanged for stock if a company’s value increases at a specified strike price, meaning that these securities may be affected by fluctuations in stock or fixed income markets.

The drops sustained by these convertible bonds illustrate how Wall Street investors face both the risk of higher price growth and the growing concerns that the technology trade has generated excessive returns since the March 2020 market ended. without steam.

“It’s a double whammy,” said Peter Sheehan, credit strategist at Loomis Sayles whose multisectoral income fund has more than 6 percent of its money in convertible bonds, including transactions from Twitter and Peloton.

The sentiment was so strong earlier this year that many companies were able to sell sales with a zero coupon, meaning they would not have to pay interest on the debt, as well as a high strike price that reduces the potential. of existing shares being diluted.

However, as inflation fears have agitated when the economy has picked up, convertible bond prices are collapsing, with higher interest rates eroding the value of debt and debt prices. shares of technology companies.

These concerns have triggered an exodus from convertible bond funds. In the week to May 12, the category has sustained the largest flows since November, with investors pulling in worldwide $ 530 million net, according to EPFR data.

“What happened? Rates have gone higher and conversions have skyrocketed,” said John McClain, portfolio manager at Diamond Hill Capital Management, who said he bought the debt now that prices have fallen.

Peloton’s zero-percent coupon bond sold in February traded up 110 cents on the dollar, but has since dropped to just 93.5 cents. Airbnb’s bond since the beginning of March has fallen to 92.5 cents and the Twitter conversion sold at a similar time has fallen below 90 cents this month before falling slightly. All three notes mature in 2026.

In turn, this pushed the yield on higher converts. Twitter’s convertible link now makes up more than 2 percent.

The Treasury’s higher yields have also put stock prices of some of Wall Street’s growth stocks, once high, seen as more sensitive to the rigors of financial conditions, under pressure. When a company’s share price decreases, the extravagant price that must be reached for a convertible bond to be transformed into capital moves further away from the money, making it less attractive for investors to hold the note.

Shares of Airbnb, Twitter and Peloton shares have fallen at least 20 percent since early March.

However, the issuance of new convertible bonds remained at record levels, with companies selling more than $ 95 billion in convertible notes globally this year through May 25, the highest for that time period. the year since Refinitiv began tracking the data. More than $ 60 billion has been issued in the last three months alone, with Coinbase bringing its latest blockbuster deal, to $ 1.25 billion, to market just last week.

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