Convertible bond issuance enters “second phase” with more entrants expected

Many companies have been turning to convertible bonds to keep ahead of their competitors during coronavirus, says Justin Craib-Cox, RWC Convertible Bonds fund manager.

Craib-Cox believes the market will see a spike in convertible bond issuance in the second half of 2020 as companies jockey to maintain their market positions having survived the initial waves of the coronavirus pandemic, or to provide capital to sectors that have seen growth.

He says: “Phase one of the crisis was really focused on two groups of issuers. First, convertibles provided financing to ensure short-term survival for companies facing drastic changes to their businesses,. Transport firms, cruise liners in particular, came to the market in need of capital to survive the chaotic shut down of their industries.

“We saw such companies raising capital through convertibles simply as a measure for survival – to pay staff, maintain fleets and pay other bills. Simply going to the credit markets at a moment like that would not be ideal as the uncertainty of the situation would lead to worse terms for the borrower. It would have been an expensive way to raise money.”

Second, he noted that another group of issuers had seen their businesses grow because of the lockdown; for example, those involved in enabling remote working or learning. He stated, “These companies saw possibilities for even greater expansion as the pandemic caused more demand for their products or services. Raising funding through a convertible is often a flexible way to do so.”

Now though, Craib-Cox believes we are seeing phase two for the market this year, with companies moving beyond survival mode and are considering how to strategize for this ‘new normal’.

He believes convertible bonds will be one of the first places companies now look to for capital raising, thanks to the volatile situation and uncertainty around what will happen next with the coronavirus crisis.

“Companies will now have to consider whether or not to put fresh capital towards maintaining a market position, or expanding into an area where another business is retreating.

“This crisis has in many ways sped up the trends we’ve seen over time, whether that is retail moving online, workers going remote or personal transport going low-key electric. So now is the moment when the most agile and innovative companies can use a fresh capital raise to enact strategic decisions that will in many ways set out the long-term winners and also-rans.”

“Using convertible bonds instead of going to investors for an equity raise, or creditors for a pure debt deal provides a middle ground for everyone where the protection of a bond is inherent, but the potential upside of equities is achievable in the right scenario.

“Markets recovered at a lightning pace from the lows of March and April, so the first phase of issuance this year proved very lucrative in the right areas. There is no reason why this can’t be replicated down the line in phase two of the crisis for markets.”