US companies are flocking to the convertible bond market to secure lower interest rates and manage significant debt maturities, a trend that stands out in an otherwise subdued corporate fundraising environment. Issuance of convertible debt climbed 77% to $48 billion in 2023, marking a return to pre-pandemic averages, and is on track to surpass $120 billion in 2026, more than double the prior year's figure for the same period. This surge is partly attributed to the "massive maturity wall" approaching, with US investment-grade companies facing $1.26 trillion in debt refinancing over the next five years, and junk-rated companies $1.87 trillion.
Convertible bonds, which can be exchanged for shares if a company's stock price reaches a set level, allow borrowers to obtain lower interest rates compared to traditional bonds. For instance, car-sharing group Uber issued a $1.5 billion convertible in November at an interest rate of less than 1%, a substantial saving when conventional investment-grade bond yields currently stand at 5.2% and junk bond yields at 7.8%. Experts like Michael Youngworth from Bank of America estimate that convertibles typically reduce interest rates by 2.5 to 3 percentage points, translating into tens of millions of dollars in annual savings for large deals.
While historically favored by younger tech and biotech firms, more established companies, including investment-grade names like Evergy and large utilities such as PG&E, are now utilizing convertibles to pay down existing term loans. This shift indicates a broader acceptance of convertibles as an attractive financing option on their own merits. The recent boom is further fueled by companies linked to artificial intelligence, which are using convertible debt to finance data centers, power infrastructure, and cloud expansion. Roughly half of the 2026 issuance is tied to AI, with notable deals including Oracle's $5 billion raise and CoreWeave's $4 billion offering.
The market’s appeal also stems from the ability of companies, especially those in risky technology sectors, to raise cheap cash amidst an "AI boom" and a "frothy" stock market. Convertible issuance tends to increase when stock valuations are high, allowing companies to borrow at lower rates with reduced immediate shareholder dilution. Even with the Federal Reserve holding interest rates at a 22-year high, companies like Lyft have issued new convertibles at lower coupons than previous ones. Despite the low interest rates offered, many recent deals, such as those from PG&E and Evergy, have been heavily oversubscribed, demonstrating strong investor demand.
