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Key takeaways:

  1. A sizeable maturity wall within corporate credit markets is leading to increased expectations for new supply.
  2. In the face of higher interest rates, companies may be able to issue convertible debt at a lower cost of capital.
  3. The convertible asset class may benefit in numerous ways from a surge of supply.

Introduction:

With policy interest rates at 16-year highs, we expect fixed income issuers to carefully consider refinancing options in the face of elevated amounts of debt set to mature over the next 24 months. Our base case for US rates is that they will remain higher for longer with cuts to be determined by progress in the US Federal Reserve’s (Fed) battle against stubborn inflation. European economies have been broadly stagnant, putting the European Central Bank (ECB) on a cautious easing path ahead of the Fed. The Bank of Japan, unlike most developed market central banks, will likely continue to tighten its monetary policy, subject to continued growth in gross domestic product, wages and prices.

Against this backdrop, many corporate bond issuers are weighing options on how to address upcoming maturities of outstanding debt. Specifically, hefty issuance in 2020 and 2021 within the convertible market, with terms typically in the 5–7-year range, is set to begin maturing in 2025 and 2026. With corporate credit bond yields in the 5%–8% range depending on the market, some issuers may find the convertible securities market to be a more cost-effective alternative with yields around 2%.

Additionally, nearly US$200 billion of existing convertible debt is coming due in the next few years, signaling a likely natural increase in issuance as companies refinance existing convertible securities. We have already started to see this happening in 2023 and early 2024. With an increase of issuance, the convertible market stands to benefit in numerous ways—increased issuer diversification, sector diversification and potentially more investment-grade issuers. A greater new issue volume provides an additional benefit as new issues tend to be priced favorably and have outperformed the broader convertibles market over time.

In this paper, we examine the maturity wall for corporate issuers across the convertible and other credit markets, consider the costs of issuing debt across various credit markets and weigh the benefits of utilizing the convertible market for refinancing needs.

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WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.

Equity securities are subject to price fluctuation and possible loss of principal.

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