Global Convertibles: 2021 - COVID Booster

31st January 2022

2021 matched 2020 record convertible issuance

Last year, we reported how the pandemic was a "shot in the arm" for the global convertible market, resulting in millennium-busting issuance for 2020. 2021 was a continuation of that theme - a COVID booster, if you will - with global issuance just under USD 200 billion, matching the record levels of the previous year.

Global issuance per annum

As the pandemic entered its second year in 2021, convertibles continued to attract a wider pool of issuers than was hitherto the case: those thriving during the pandemic as well as those in need of "rescue" financing, as we have commented on in our previous reports (Convertibles: Hitting the Headlines from May of 2020 and Global Convertible Issuance: Pandemic a Shot in the Arm, our 2020 issuance review).

Issuance by Region - click on individual regions in the legend to include or exclude.

The US market continued to lead 2021 new issuance, with USD 97.2 billion raised from 173 individual issues. Whilst this was a notable decrease from 2020's record USD 117.1 billion across 208 issues, it is still more than double the average annual issuance of USD 42.2 billion for the decade before the pandemic hit.

Lower issuance in the US was more than offset by upticks in the Asia markets. The growth in the Chinese domestic convertible market picked back up (issuance having dropped to USD 32.7 billion in 2020 after the record of USD 40.9 billion in 2019), reaching a new high of USD 41.6 billion and cementing its position as the second largest region behind the US. Asia ex-Japan has also shown strong growth during the pandemic, with issuance in 2021 expanding to USD 24.6 billion, from an already healthy 15.7 billion in 2020 (average annual issuance being just USD 8.5 billion in the decade prior to the pandemic). Whilst not a new structure, it was interesting to note that nearly all of the Taiwanese issuers (6 out of 7) that came to the international markets in 2021 utilised the fx-linked, $-settled structure. Japanese issuance also picked up to a comparatively decent USD 7.4 billion, breathing life back into a market that has been shrinking rapidly following negligible issuance in 2019 and 2020.

The dip in US issuance was echoed in the EMEA region which also fell back in 2021 compared to 2020 (USD 25.1 billion vs USD 29.4 billion, respectively), although that is where the similarity ends. Whilst the likes of the US and Asia ex-Japan have seen strong growth in convertible issuance over the course of the pandemic versus the prior decade (153% and 142%, respectively), EMEA has been relatively flat, with average annual issuance for 2020 and 2021 only 21.5% above the average for the prior decade.

Regional issuance per month

Issuance appeared to reflect the relative successes and setbacks in dealing with the pandemic over the course of 2021. The first half of the year accounted for almost two-thirds of the year's global proceeds when, with signs of success from vaccine rollouts becoming visible and the pandemic’s end seemingly in sight, market uncertainty began to abate by summer, dampening corporates’ appetite for converts. Then, as first Delta and then Omicron variant "spanners” were thrown into the global recovery, primary convertible market activity picked up again towards the end of the year.

We are happy to have been proven wrong in our assessment this time last year, that “it would be unrealistic to expect issuance in 2021 to match the stratospheric levels of 2020”. We, like many others, were perhaps overly optimistic in hoping that the worst of the pandemic was behind us.

This year there seems to be growing confidence that we are at least learning to live with an endemic COVID. Given our assertion that much of the bumper issuance over the last 2 years has been pandemic driven, and at the risk of repeating our mistake, it really does seem unlikely that issuance in 2022 could match the boom of 2020-2021. We do however see other factors emerging that may yet prove beneficial to the convertible primary market. The counter-cyclical nature of converts means that economic headwinds such as expectations of higher interest rates, as global bankers attempt to fight rising inflationary pressures, and elevated levels of volatility may prove to be tailwinds as they help convertibles appear more attractive relative to straight bonds.

We note with interest the number of post-SPAC merger companies in the US that have been turning to our market to raise early follow-on capital. Given the sheer volume of capital raised through SPACs over the last few years, this may well prove to be another benefit to convertible issuance. In 2021, 577 new SPAC deals completed initial IPOs raising USD 148bn, up from 240 deals raising just over USD 81bn in IPO proceeds in 2020, based on Monis' own data which covers the SPAC warrant universe.

SPAC issuance per annum

At Issue Characteristics

Looking at average issuance terms over the last six years (excluding the domestic Chinese market), yields in Europe and Japan remained fairly flat YoY, but US and Asia had two different trends occurring in 2021. After a sharp decline in 2020 to a sub-1% level, the average at-issue yield in Asia nearly doubled in 2021 to 1.7%, even slightly higher than its 2018-19 levels.

Meanwhile, after staying flatish for four years around 2.7% ballpark (following a previous sharp decline from 4-4.5% levels observed in the middle of the last decade), the US witnessed a further sharp decline in its average at-issue yield to 1.9%. Starting in 2020, the prevalence of zero-coupon/zero-yield issues (so called "no-nos"), previously quite rare in the US, began to grow and has become almost expected in 2021. More than a quarter of new US issues came with a zero coupon last year. Brought predominantly by larger issuers with a higher than average issue deal size, their contribution to the gross US proceeds was almost 40%. If one adds near-zero coupons (0.25% or lower) to the tally, the number of these deals reaches a remarkable 40%, accounting for 55% of US issuance proceeds. Strong investor demand for new convertible paper, better quality issuers, still fairly low interest rates and high market volatility all contributed to this trend.

With the coupon/yield compression in 2021, at-issue premiums in the US continued to expand, steadily rising over the last 4 years. Asia has also witnessed premium expansion over the pandemic years, even as their average yields increased.

EMEA on the other hand saw a premium contraction towards pre-pandemic levels, after a sizeable premium expansion in 2020. Meanwhile, Japan's average premiums stayed flat YoY, while well below their pre-pandemic numbers, helping compensate investors for the region's unrelenting negative average yields.

Average issue size has increased quite noticably during the last two years relative to the pre-pandemic levels. Japan has experienced the most dramatic increase between 2019 and 2021 (USD 121.4 million vs USD 409.2 million), more than tripling its average issue size during that period, albeit this increase was driven by 2 large deals from ANA (JPY 150 billion) and Nippon Steel (JPY 300 billion dual-tranche) - without them, the average size would have been flattish around USD 200 million.

Asia ex-Japan's average size almost doubled during the same time frame (USD 284.4 million vs USD 522.4 million), and this was also skewed by the two Singapore Airlines mandatory convertible bonds that were issued in 2020 and 2021 as part of wider deals marketed to equity (rather than convertible) market participants (combined issue size USD 7.18 billion). Similarly, the US has witnessed a steady issue size increase since 2017, from USD 365.6 million to about USD 560 million both in 2020 and 2021. EMEA was the only region to see issue size decrease in 2021 following an increase in 2020, although the average remains generally high (USD 511.5 million.) It appears that the pandemic years have brought the convertible market to the attention of larger issuers, highlighting its capital raising value in volatile times.

Secondary Market Performance

After a spectacular 34.7% return in 2020 (versus S&P 500's 15.6% and Russell 2000's 20%), with the majority of outperformance fuelled by the US's fantastic 48.2% return, Monis' long-only Global Convertible index returned a far more subdued - some may even say, disappointing - 1.8% for the year in 2021. That compares rather unfavourably to the 26.9% return by the S&P 500 and even the 13.7% by the Russell 2000, which is arguably more comparable to convertibles' underlying equities. Broadcom, Sika, Palo Alto Networks, Danaher and Dick's Sporting Goods were the top 5 positive contributors to the Monis Global Convertible Index performance; Zillow, EDF, Coupa Software, Farfetch and Pinduoduo were the biggest detractors.

When we consider the cumulative performance over the last two years, 2020 plus 2021, convertibles appear in a much more favourable light relative to equities. The combined 2-year return for the global index is a respectable 37%, with the US CB market up almost 51% for the same period, which is still ahead of the S&P 500's 47.5% cumulative 2-year return. It is almost as if the convertible market pulled a double work shift in 2020 and took the 2021 mostly off, acting like a proverbial hare to the stocks' tortoise who just about caught up by the end of last year.

Market Composition by Sector

The convertible market naturally attracts higher growth/higher risk issuers, like those in the Technology and Healthcare sectors. However, the biggest story in 2020 was the influx of airline, cruise line and retail store issuers, most of whom came to the convertible market looking for rescue financing and ended up doubling the weight of the Consumer Discretionary sector within the US convertible universe from 16% to 30% between 2019 and 2020. This was the result of a combination of strong new issuance at lower stock levels, followed by impressive stock and convertible secondary market performance.

Consumer Discretionary sector issuers remained second only to convertible market darlings, Technology companies, albeit mixed performance coupled with market buybacks and redemptions pressured the sector's weight lower to 23% of the US universe by the end of last year.

US market composition end of 2021

The strong growth in Asia has also seen the Consumer Discretionary sector expand to a remarkable 34% of the secondary market. However, a large portion of that is attributable to the previously mentioned Singapore Airlines issues. The sector was also bolstered by the USD 2.94 billion dual tranche deal for Hong Kong listed online shopping platform, Meituan. Cathay Pacific’s HKD 6.74 billion (USD 780 million) was another notable “rescue financing” addition to the sector.

The relative weight of the Real Estate sector in Asia over the last few years has been fortified by Hong Kong-listed, mainland Chinese Real Estate companies. Interestingly, despite recent travails, convertible issuance from the sector has picked back up, with a number of deals in the latter half of 2021 and into early 2022, often coming with high coupons and low premiums.

Asia ex-Japan market composition end of 2021

2022 Potential Retirements

Our analysis of potential future retirements includes issues maturing in the next 12 months as well as those where we reasonably expect puts may be exercised. These potential retirements from the global market amount to an outstanding principal amount of USD 56.2 billion, with a current market value of USD 70.1 billion. Total retirements are expected to be significantly higher, particularly if underlying equity performance remains strong in 2022, as call-forced and other conversion events contribute, in addition to market buybacks, takeover events and occasional bankruptcies.

We would hope, however, that even a more subdued rate of issuance in 2022 would more than cover these expected outflows, further contributing to the growth of the global convertible universe. Over the course of 2021, the global market experienced net issuance of roughly USD 78.3 billion, as the total principal amount outstanding increased from USD 531 billion to USD 609 billion.

2022 Potential Retirements - hover over a segment for regional totals (USD bil)

All figures are based off MDS' investible universe of convertibles, which is defined as minimum issue size of USD 50mm or equivalent ex-China domestic market and minimum issue size of USD 100mm or equivalent for China.

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