Convertible bonds are booming again
Since the financial crisis of 2008, convertible bonds have been in the doghouse. However, they are making a remarkable comeback. In an article from Het Financieele Dagblad, Professor of Corporate Finance at Erasmus School of Economics Patrick Verwijmeren elaborates on the comeback of convertible bonds.
Just Eat Takeaway is no unfamiliar name: the partly Dutch meal delivery company is on the rise, acquiring competitor Grubhub for a dazzling sum of 7.3 billion dollars. In order to do so, it has issued convertible bonds for an amount of 1.1 billion euros. This is indicative of a comeback of convertible bonds, since the stark decline in 2012 to an issuance of 25 billion dollars in convertibles. Verwijmeren: ‘Convertible bonds are booming. They are mostly popular amongst companies that to investors are hard to properly be estimated risk-wise’.
A remarkable change in comparison with convertible bonds before the financial crisis, is the interest rate paid on the convertibles. According to Verwijmeren, this has to do with the expected buyer’s premium. To refer to Just Eat Takeway: investors accept a sometimes even negative interest rate due to a projected buyer premium of 30 to 50 percent. ‘Ten, twenty years ago, companies with a high risk paid rates of 10 percent. Less risky businesses paid a risk premium of 4 percent. In the present, risky companies pay a premium of at most 4 percent’. Companies that are viable such as cruise companies, will probably see a rising rate when the effects of the current pandemic disappear. In such cases, convertibles are profitable. However, this does not always make convertibles a sensible investment instrument: if stock prices fall, converting the bond to shares is no good. In that case, being paid in cash is better.