Convertible bonds cruise back into fashion as rates rise Corporations seeking cheap financing are issuing convertible bonds in the US at the fastest pace since the financial crisis, with the recent rise in interest rates adding to the rush. Convertible bonds allow companies to issue debt at ultra-low yields but give investors the option to convert the securities into stock if the share price reaches a preset premium during the bond's tenure. The pick-up comes after a multiyear slowdown in the sector that saw the bonds fall out of favour among companies, which until recently could issue junk or investment grade bonds at historically low yields. But a quick reversal in interest rates and widening credit spreads, triggered by heightened speculation that the Federal Reserve could slow the pace of monetary stimulus, has made it increasingly attractive to tap the convertible market. This month is set to be the most active for issuance in over two years, despite a sell-off in Treasury, credit and equity markets that could slow issuance across the bond market. Companies have raised $22.4bn so far this year, surpassing the entire amount raised last year and putting the market on track for its best year since 2008, according to Dealogic. "With debt previously trading at all-time highs, the rationale for a convert was more challenging," said Prasanth Burri Rao-Kathi, head of Americas equity-linked capital markets at Bank of America Merrill Lynch. As the straight bond markets weaken, inquiries and deals . . . will pick up. Bondholders on average are able to convert their instruments into equity when the share price is at a 25-35 per cent premium compared with the time of issue, analysts said. With the S&P 500 touching an all-time high in May, confidence among issuers of convertibles has increased and made them more comfortable with the prospect of issuing dilutive shares. Technology companies have been among the biggest beneficiaries of the uptick because shares in the growth-orientated businesses are more likely to hit the level where the instruments are converted into equity. Online travel company Priceline.com at the end of May raised nearly $1bn from a seven-year convertible bond that paid a coupon of just 35 basis points and had a conversion premium of 66 per cent. Shares in the company were trading near an all-time high at $792.27, putting the conversion price at $1,315. Analysts said that deal represented the top of the market. "Because of a lack of issuance over the past few years, there has been a huge supply and demand imbalance between issuers and investors in the convertible bond market," said Venu Krisha, head of equity-linked strategies research at Barclays. Priceline tapped the market at the top in terms of aggressive pricing in light of this imbalance. He added: "Issuers are still getting very attractive pricing but the sell-off in the credit and stock markets will dampen investor appetite for aggressively priced transactions."