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Q3 2022 - Convertible activity rebounded against a challenging market backdrop

For the first time since late 2021, companies with appreciated stock prices participated in opportunistic convertible deals.

In brief

  • Convertible volumes rise and average deal size picks up. 
  • Refinancing activity drove deal flow, with a modest pickup in opportunistic issuances.
  • Positive convertible pricing dynamics support improvement in issuance conditions.

Convertible activity rebounded against a challenging market backdrop

While the summer is typically a slower time in the capital markets, convertible issuance picked up in August and early September following a very quiet first half of 2022. Refinancing transactions remained the primary driver of deal activity, but for the first time since late 2021, companies with appreciated stock prices participated with opportunistic deals. Call spread utilization remains in line with the first half of the year at approximately 40% of convertible debt deals, which ironically is lower than in the last few years as issuers remained focused on increasing net proceeds despite lower valuations and stock prices. With a few months left in 2022, we have included perspectives on recent convertible market trends and what may lie ahead for activity in the coming quarters.

Convertible volumes rise and average deal size picks up

Fourteen deals priced in the third quarter raising $10.5b, more than the combined volume raised across Q1 and Q2 2022 ($9.5b), though lower than the $14.1b raised in Q3 2021. While issuance in the quarter lagged the record-setting pace of 2020 and 2021, volume in Q3 was more consistent with the pre-COVID-19 convertible market when quarterly volumes averaged $12.7b (2016–19). In recent years, deal volumes were driven primarily by large-cap technology issuers raising opportunistic growth capital; however, activity in Q3 2022 felt more representative of what the convertible market had been historically: a source of low-cash coupon funding with upside retention for companies balancing financing needs and cost of capital against other available funding alternatives (debt or equity). While the technology sector has historically represented about 60% of convertible debt issuance volume over the last several years, a more diversified set of issuers came to market in Q3 with representation from the real estate, consumer, industrial and energy sectors pushing technology’s share of volume for the quarter down to 18%.

As there was no material pickup in the number of deals relative to Q1 and Q2, increased volumes were primarily driven by larger deal sizes. The average offering in Q3 raised $750m, which is the largest average size ever, and more than double the $340m realized in Q2. We do not believe there is a specific driver of this dynamic, rather a few contributing factors may have led to the pickup in deal size, Including:

  1. Sixty-two percent of convertible debt deals upsized their offerings in the third quarter, representing the third highest quarterly percentage in the last 25 quarters. In volatile markets, issuers often launch deals with more conservative terms and smaller sizes, then look to increase proceeds by upsizing their offerings into strong demand as the demand materializes during the marketing process.
  2. Larger, debt-worthy issuers come to market using convertibles as a lower-cost refinancing strategy vs. attractive opportunistic funding.
  3. Smaller issuers, or those looking to raise more modest amounts of capital, may be holding off on deals until the market firms up further.
  4. Some issuers refinancing smaller outstanding convertibles are turning to negotiated exchanges to work with existing investors to minimize market risk rather than pursue new issue or public transactions.
  5. Four deals this quarter raised more than $1b (compared with one previously this year), and with a limited number of transactions overall, these larger deals had an outsized impact on the average deal size.

Refinancing activity drove deal flow, with a modest pickup in opportunistic issuances

As we have discussed in previous quarterly updates, many of the convertible financings from the end of 2020 through 2021 were executed by issuers trading at or near all-time highs, raising capital to opportunistically fund growth or pre-fund potential future M&A activity. In softer equity markets with increased volatility, opportunistic issuance tends to dry up as the majority of issuers do not raise capital unless necessary, with financing needs most commonly driven by upcoming maturities, cash flow needs and M&A requirements. True to form in Q3, 10 out of the 14 issuers used proceeds to refinance debt, and just three issuers cited growth financing.

While many issuers, particularly those with refinancing needs, do not have the luxury of waiting for an optimal time to raise capital, well-prepared issuers can still be opportunistic within more challenging financing windows. Companies that have finalized their security structure, bank selection and documentation can be in and out of the convertible market within one to two days, increasing the likelihood they can access the market on a relatively opportunistic basis. Issuers with modest timing flexibility will typically seek positive stock price momentum prior to launching their convertible offerings. This theme held in the third quarter. Of the 14 convertible deals this past quarter, issuer stock prices were up approximately 20% on average in the three months prior to deal launch, with four issuers raising capital on the back of over 60% stock price appreciation in the three months prior to pricing.

Positive convertible pricing dynamics support improvement in issuance conditions

As convertible markets transition from an opportunistic to a more selective environment, a typical pricing cycle emerges:

  1. Deals executed at the end of a risk-on market period are priced with aggressive coupons and conversion premiums, with these deals trading weaker in the secondary market as broader conditions deteriorate.
  2. Convertible investors experience negative aftermarket trading performance, become more conservative when buying new deals and demand more investor-friendly terms (e.g., higher coupon and/or lower conversion premium).
  3. These more conservatively priced deals perform better in the aftermarket, investors start to make money by participating in the new issue calendar and slowly return to a risk-on mentality with more issuer-friendly terms available.
  4. As deals price more efficiently for issuers, companies sitting on the sidelines may be incentivized to return to the markets, creating positive momentum in the market.

Notwithstanding the sharp drop in the equity markets in September, the majority of the third quarter felt like a transition from steps (2) to (3) above. Convertible deals in Q3 priced relatively aggressively and traded well after pricing. Investors receiving deal allocations made money as 12 of 14 convertibles expanded on a dollar-neutral basis the first day of trading. Not only were issuers able to upsize their deals as noted above, but more than 70% of the deals priced between the middle and issuer-friendly end of the initial coupon and/or conversion premium launch ranges.

The majority of convertible issuance in Q3 occurred prior to the late September drop in the equity markets. While those deals largely traded well out of the gate, most are now trading below par on an outright basis given the stock price depreciation (though hedged investors are less exposed to that factor). While recent post-pricing trading dynamics will be beneficial for issuers coming to market, the latest leg down in equity prices is likely to put a damper on near-term issuance as companies pause to assess market conditions and their own valuations.

However, we do expect to see an uptick in issuance from nontraditional convertible issuers. While growth sector valuations and stock prices will likely limit near-term deal activity broadly, the rapid rise in interest rates throughout 2022 has significantly driven up the costs of nonconvertible financing across ratings categories and issuer profiles. Given the embedded equity option inherent in convertible debt, only approximately 50% of this rate increase is reflected in convertible coupons, increasing the relative appeal of convertible debt from a cash cost perspective. As such, we expect debt-worthy issuers to consider convertibles as a component of their financing strategy to manage their cost of capital, which should drive new issuance in the market.

Ultimately, as investors gain clarity on inflation and the Fed’s expected behavior, we expect share prices and valuation metrics to stabilize, leading to a rebound in market activity. This potential recovery, in addition to nontraditional issuers seeking to save between 500 bps to more than 700 bps on their financing costs, could drive deal activity as early as the November and December window, and more prevalently in 2023.


Managing a dynamic capital structure can be challenging against the current market backdrop.  Our capital markets advisory team provides an independent perspective and can help identify ways to save money and reduce deal risk.

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