Tech Firms Are Buying Back Their Busted Convertible Bonds
(Bloomberg) — Booming credit markets are giving tech companies a golden opportunity to tackle the hefty debt pile they took on during the easy money era.
Coinbase Global Inc., Ubisoft Entertainment SA and Snap Inc. are among companies that have been able to easily sell new convertible bonds and buy back their old busted notes at a discount. It’s a relief for the firms, which were facing short deadlines to repay the debt, as they are effectively repaying less than they borrowed in the first place.
Back when interest rates were low, it was popular for fast-growing companies to sell zero coupon convertibles that paid no interest and gave investors an opportunity to hitch a ride on rocketing stock prices. But once rates started to rise, many of those bonds went bust, meaning they were unlikely to convert because of the wide gulf between the share price and the conversion price.
Many of the old convertible notes had fallen into distressed territory of below 80 cents on the dollar in the last two years. But now with risk appetite running high and tech shares soaring to frothy heights as the Nasdaq 100 Index scales record levels, investors have been eager to take a chance on convertibles and provide companies with fresh financing.
“They are addressing their maturity earlier than normal to extend it,” said Nicolas Cremieux, head of convertible bonds at Mirabaud Asset Management. “This makes a lot of sense.”
For the companies, it gives them more breathing space, even if they’re having to pay a higher interest rate. Globally, there’s about $27.5 billion in convertible debt due this year, down from $46 billion a year ago, according to Bloomberg data that excludes financials. The maturity wall for 2025 is also falling. There’s about about $67 billion due next year, down from $87 billion.
New convertible bonds are also attractive for investors because they have lower conversion prices, meaning there’s a bigger chance investors can cash in the shares, Mirabaud’s Cremieux added.
Coinbase, for example, sold $1.1 billion of convertibles last week and intends to use the proceeds to buy back some outstanding notes due 2026, 2028 and 2031, many of which trade at a discount.
Last year Ubisoft sold €494.5 million ($535 million) of convertibles at a coupon of 2.875%. The maker of the popular Assassin’s Creed game franchise used some of the funds to repurchase €250 million of its zero coupon convertible bonds maturing in September 2024.
To be sure, it could become more difficult for others to issue new convertibles if the stock market starts to tumble. And not all companies have been able to easily refinance.
Delivery Hero SE had to go down the more expensive route of issuing a new term loan to fund its repurchase of convertible bonds. The yield is indicated at over 10%, considerably higher than the coupons on most recent convertibles.
The German food delivery service shot to prominence during the pandemic, but has since seen its shares slump more than 80% from a 2021 peak. A spokesperson for Delivery Hero declined to comment.
“It depends on the idiosyncrasies of each individual company, but overall bank loans are not that cheap and relatively constraining,” said Alexandre Fade, a convertible bond portfolio manager at Fisch Asset Management.
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