According to data compiled by Bloomberg, U.S. companies have issued $81 billion in convertible bonds this year (as of 12/16), a 46% increase compared to 2023, marking the third highest in over a decade. Richard Duffield, head of capital markets at Citigroup, stated that issuance in 2025 could range between $70 billion and $90 billion, with a chance to challenge the highs seen during the pandemic, as interest rates remain higher than many on Wall Street expected, and strategies related to crypto assets show no signs of disappearing soon.
MicroStrategy leads the issuance of convertible bonds in the crypto industry
Cryptocurrency trading has been a major driving force for convertible bonds in 2024. MicroStrategy raised $6.2 billion this year through convertible bonds, encouraging several other companies to follow suit with their own convertible bond issuance to buy Bitcoin.
(What is the operational principle behind MicroStrategy's issuance of convertible bonds with low interest rates and high stock conversion prices?)
MicroStrategy's recently issued convertible bonds not only do not provide interest (the coupon rate is zero), but the conversion price is also at a premium of as much as 55% compared to the current stock price, indicating their active trading. Many financial institutions in Taiwan, including Cathay, Fubon, China Trust, and Yuanta Securities, have purchased these convertible bonds.
(Taiwanese financial institutions are also crazy about MicroStrategy's convertible bonds, with Cathay, Fubon, and Yuanta all participating)
MicroStrategy announced the '21/21 Plan' at the end of October, aiming to raise $42 billion in capital over the next three years, which includes $21 billion in equity and $21 billion in fixed-income securities. This plan will further support its acquisition of Bitcoin as part of its reserve asset strategy. With an average annual issuance of $7 billion in convertible bonds, this could account for 7.8% of the estimated annual issuance in the U.S. (estimated at $90 billion).
(Understanding MicroStrategy from scratch: the transformation journey from Business Intelligence (BI) to a Bitcoin empire)
Increased volatility attracts hedge funds for arbitrage
Duffield from Citibank stated that better terms are driven by the simple fact that stock market volatility has increased and most benchmark indices are at or near historical highs.
Convertible bonds often attract hedge funds focused on arbitrage. Hedge funds purchase convertible bonds and short the underlying stock as a bet on the volatility of the underlying stock. The greater the stock volatility, the higher the trading profits.
Volatility has risen again in the past two months, and the zero-interest convertible bonds seen from cryptocurrency companies are a result of the extremely high volatility in that industry.
However, this also means that if Bitcoin falls back from its record run, volatility could only lead to additional convertible bond sales so far.
This article discusses how MicroStrategy's zero-interest convertible bonds are selling well, driving the issuance of convertible bonds in the U.S. to a record high, first appearing in Chain News ABMedia.
