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1.9万亿美元债务迫近 “借新还旧”趋势下可转债市场有望迎“扩容期”

The convertible bond market is expected to enter an “expansion period” as $1.9 trillion debt approaches the trend of “borrowing the new to pay off the old”

Zhitong Finance ·  11/22/2023 13:50

The 2023 global banking layoff crisis has occurred month after month throughout the industry, yet one area has basically escaped the disaster of layoffs. According to public data, at a time when refinancing by US junk rating companies is imminent, commercial banking giants such as Santander Bank and TD Bank are recruiting convertible bond-related personnel on a large scale.

A number of banks, including Spain's Banco Santander (Banco Santander) and the US investment banking division of Toronto-Dominion Bank (Toronto-Dominion Bank), have been expanding the size of their convertible bond teams. These commercial banking giants expect that companies that refinance existing debt will be attracted to this asset class for some time to come.

Moody's latest statistics show that in the face of the general expectation that global interest rates will remain at a high level for a longer period of time, the relatively low coupon size of convertible bonds and the current decline in financing interest rates in the bond market may be irresistibly appealing to the huge debt of US junk rating companies of 1.87 trillion US dollars due from 2024 to 2028. In other words, under the “borrow new debt to pay off old debt” trend, interest rates for issuing convertible bonds are very attractive to companies that are under high pressure to refinance.

Syed Raj Imteaz, head of convertible bonds and equity derivatives consulting from ICR Capital LLC, said: “If you believe in the idea that the convertible bond market will become very busy in the future, then the bank's recruitment of relevant staff today is a wise move.”

Convertible bonds surpass $50 billion — banks hope the maturity wall of US junk bonds will drive this asset to continue to grow

Expectations of easing in the bond market are heating up, and the convertible bond market is expected to usher in an “expansion period”

In June of this year, TD Bank hired Carey Squires, a former co-head of the equity-related capital markets division of Bank of Montreal in Canada. Recently, the agency also brought in Tucker Martin, a veteran employee who has worked for Credit Suisse for 19 years focusing on the convertible bond market.

The banking giant has already begun to generate relevant benefits after expanding its scale: US online car-hailing giant Uber Technologies (Uber Technologies) issued convertible bonds on Monday, led by Barclays Capital, and Uber's fundraising scale has increased to 1.5 billion US dollars. TD Bank is one of the joint bookkeepers and is listed as a bookkeeper along with the three major Wall Street financial giants Goldman Sachs Group, Bank of America, and J.P. Morgan.

In the current bond market environment, issuing convertible bonds is relatively easy. Uber will use part of the proceeds from the newly issued convertible bonds (coupon interest rate is 0.875%) to redeem 2025 outstanding notes worth about $1 billion (coupon interest rate is 7.5%).

Generally speaking, at current levels, direct bond issuance and convertible bond financing coupon spreads are around 400-500 basis points. This is in stark contrast to most of the past 15 years. After 2008, the Fed once maintained a system near zero interest rates to provide enterprises with a wide range of low-cost debt financing options, essentially eliminating the interest rate advantage of issuing convertible bonds.

Uber currently has a market capitalization of around US$113 billion, making it the largest listed company to enter the convertible bond market this year. Its latest move takes advantage of the recent sharp decline in US bond yields, prompting opportunities brought about by falling interest rates in the bond market, which anchors US bond yields, because the market is increasingly convinced that the most aggressive rate hike cycle started by the Federal Reserve in a generation has come to an end. The yield on 10-year US Treasury bonds, known as the “anchor of global asset pricing,” fell from 5.02% in October, a new high since 2007, to around 4.40% as of the closing of US stocks on Monday.

After the release of weak US CPI and PPI data, as well as the renewal of unemployment claims, which had reached a two-year high, investors and traders alike expected the Fed to cut interest rates sharply. The index that measures US Treasury bonds rose 2.8% this month, the biggest monthly increase since March. Federal funds futures show that at present, traders expect the Federal Reserve to have raised interest rates and will begin a cycle of interest rate cuts in mid-2024, and expect interest rate cuts to be close to 100 basis points next year.

Talents who are proficient in convertible bond business may become the banking industry's “hackeys”

Imteaz from ICR said: “For me, 2010 to 2018 can be described as a 'lost decade' for convertible bond market converts.”

According to reports, since the asset does not have any restrictive contracts, it has always been very attractive to rapidly growing non-profit technology companies and life science companies. As the market expects interest rates to remain high for most of next year, the heavy burden of interest payments forces large companies to think twice.

“There are limited ways to reduce the cost of capital, and the convertible bond market is the easiest way to achieve low cost goals,” said Richard Duffy, head of equity-linked capital markets at Citigroup. “We expect that the balance between rated and unrated bonds in the convertible bond market will be more in line with what we are seeing today, that is, closer to five five.”

What is certain is that central bank officials have always stated that they are committed to keeping inflation at 2% to anchor the target. Recently, however, Federal Reserve Chairman Powell and others have indicated that central banks will act with caution, revealing a major signal of the end of the global central bank interest rate hike cycle. This puts companies that bet on continuing interest rate hikes at risk of confrontation with the Federal Reserve. The recent sharp decline in US bond yields has prompted a decline in financing interest rates in the bond market, which anchors US bond yields, and will also push the scale of convertible bond issuance to usher in a period of expansion.

For commercial banks that want to strengthen their convertible bond business, issuing convertible bonds is a fairly streamlined business, which is very helpful. Even in large commercial banks, only a few managing directors are responsible for this business, and the number of managing directors responsible for initial public offerings (IPOs) is often four to five times as many. Although the profit margin on processing fees brought about by IPOs is usually higher than that of issuing convertible bonds, the larger scale of bond transactions and the relatively shorter development process make up for this.

ICR Capital predicts that even if the goal of inducing issuers to abandon direct debt issuance is not achieved, about 180 billion US dollars of convertible bonds will expire in the next three years. These bonds require refinancing as strong financial support.

“Over the next 12 to 24 months, many commercial banks will seek to hire more bankers on convertible bonds.” Imteaz said. “At that point, I don't know if there will still be so many relevant talents for banks to select.”

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