US convertible bond sales have reached their highest annual total on record, according to data compiled by Bloomberg, as companies look to fund heavy artificial intelligence-related spending.
Companies with US listings have raised $131 billion from the sales of bonds that potentially convert into stock under certain conditions, with the $25 billion gathered in August propelling the annual total above the previous record from two years ago, the data show.
The activity has drawn in upstart AI cloud companies such as Nebius Group NV, the Amsterdam-based firm that raised $5.75 billion across two issues announced last month. But investment-grade firms have also piled in, with Alphabet Inc. producing the year’s biggest convertible securities as part of its $85 billion fundraise.
“We are cresting well above what we have seen historically because the financing need is so much greater due to AI and AI-related build-out, combined with a re-emergence of more investment grade issuers,” said Craig McCracken, the head of structured equity solutions within equity capital markets at Wells Fargo & Co.
About 44% of this year’s convertible bond sales have come from AI-related companies, Spencer Rogers, a Goldman Sachs Group Inc. strategist, wrote in a report earlier this week.
Dominating this year’s deal mix are hefty equity-like mandatory convertible preferred stock offerings such as Alphabet’s, which accounted for $20.5 billion in a two-part deal in June, and Oracle Corp.’s $5 billion offering in February. Unlike most other convertible bonds, mandatory convertible securities don’t give holders the option to receive the principal back in cash when they mature.
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Favorable Terms
The demand for convertible securities is helping companies capture favorable terms. Many such bonds have relatively low coupons and high so-called conversion premiums, the amount that the company’s stock must rise from a pre-determined reference share price for the embedded option in the bond to be in-the-money. That often makes convertible bonds less dilutive to existing investors than selling shares, and less expensive than selling conventional bonds.
Specialized AI cloud computing companies such as Nebius, CoreWeave Inc. and Iren Ltd. rank alongside Alphabet and Oracle in the top 10 issuers raising the largest amounts via equity-linked securities, Bloomberg data shows. Even with 10-year US Treasury yields pushing toward 5%, a number of these companies have able to offer zero-coupon convertible bonds. The share of new convertible bonds with no coupon is nearly 30%, according to Goldman Sachs’ Rogers.
For certain arbitrage-focused investors, growth-stage companies’ zig-zagging share prices make their convertible bonds especially attractive.
“Pricing is more competitive relative to straight debt alternatives since there’s more volatility in this environment, and investors are paying more for volatility than they have historically,” McCracken said.
That demand helps companies issuing convertible bonds keep a lid on borrowing costs amid rising interest rates.
“If you can do straight debt with a coupon of 7.5% but a convert for 1.5%, that an enormous difference,” said Jason Wood, founder and chief executive of J. Wood Capital Advisors, an independent corporate adviser that specializes in convertible bonds.
“On an average $800 million deal size, it’s nearly $50 million a year of cash-flow savings,” Wood said.
With companies racing to meet AI models’ bottomless need for computing capacity, the bonanza of spending on everything from chips and server racks in data centers to real estate they sit on and the power they consume shows no sign of slowing. As long as the largest tech companies to include convertible securities in their funding mix, bankers expect more records to fall.
“Investment-grade companies may be smaller in number than sub-investment-grade issuers, but their average issuance size is far greater,” McCracken said.
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