Matthews South

Strength Amid Choppiness: Q1 2025 Convertible Market Review

by | | Convertible, Convertible & Call Spread, Market Review

As part of our market update series, below are our key takeaways in the convertible market in the first quarter of 2025.
  • New issue activity in Q1 totaled $15.1 billion, tracking 31% below 2024 issuance levels but in-line with historical averages. Potential issuers have remained on the sidelines to start the year given the uncertain macroeconomic backdrop.
  • Refinancing activity continues to be a major theme in the convertible market, with nearly half of all issuers in Q1 using proceeds to refinance existing convertibles or straight debt.
  • One-third of all deals priced on an overnight basis in Q1, which is the highest proportion in the last two years. We expect issuers will continue to use the overnight execution format to minimize market risk in the current volatile environment.
  • Convertible asset class remains well bid as hedged investors achieved positive returns on the quarter, despite a risk-off sentiment in broader financial markets.
New Issuance:  Q1 2025 saw 22 new issue convertible deals (20 vanilla and 2 mandatories), for a total volume of $15.1 billion. It was a muted start to the year relative to 2024 issuance levels, as potential issuers grappled with an uncertain market backdrop. Average deal size in Q1 was ~$690 million, marginally higher than the 5-year average.
We saw a broadening of the convertible issuer base in 2024, as tight credit spreads, elevated volatility, and attractive deal terms made the convertible market an attractive and viable asset class for a variety of issuers. While the issuer base to date in 2025 has been more limited, we expect to see a good mix of issuers across sectors as the year progresses. Notably over the last two quarters, we have seen significant growth in issuance from companies raising convertible capital to purchase bitcoin.

Terms:  The new issue environment in Q1 remained fairly constructive, as higher rates and credit spreads were slightly offset by higher volatility. The average coupon of 2.16% in Q1 is an improvement over average 2024 levels, but that is partially a function of a greater portion of the issuer base coming from technology and bitcoin-related sectors. Within the technology and healthcare sectors specifically, the average coupon widened relative to Q4 2024 levels.

 

Average Convertible Debt New Issue Coupon Rate and Conversion Premium 2022 – 2025

Sector 2022 2023 2024 Q4 2024 Q1 2025
All Deals
3.45% / 29%
3.50% / 30%
2.62% / 31%
1.88% / 33%
2.16% / 31%
Technology
2.68% / 31%
2.80% / 27%
1.86% / 34%
1.34% / 37%
2.04% / 31%
Healthcare
3.08% / 30%
2.56% / 30%
2.69% / 31%
1.75% / 33%
2.16% / 33%
Average 5y UST
3.00%
4.06%
4.13%
4.12%
4.25%
Pricing Results: Theoretical Value:  The graph below illustrates the theoretical values of the deals that priced over the last 12 months. A value of 100 represents a deal that priced at fair value with no “cheapness” and anything greater than 100 represents some theoretical new issue concession. The average cheapness in Q1 was 2.1 pts, below the trailing 12-month average of 2.4 pts, which represents an attractive valuation for new issue deals. Despite a risk-off sentiment in equity markets through much of Q1, demand for new issues in the convertible market remained quite robust while supply was limited relative to recent quarters. This dynamic resulted in issuers generally achieving terms at attractive theoretical valuations.
Pricing Results vs. Price Talk:  Pricing outcomes for issuers in Q1 were quite balanced, with 43% of new issues pricing better than the midpoint of the marketing range, while 24% of deals priced worse than the midpoint. This trend reflects that the buyside was more sensitive to the pricing of new issues in Q1 relative to the recent past, where the majority of offerings priced to the favor of issuers. Interestingly, one-third of all deals in Q1 priced on an overnight basis, as certain issuers sought to minimize market risk in the current environment. We expect this trend to continue through 2025 with heightened market volatility and a higher risk of large intraday stock price moves.
Secondary Trading:  Average returns for convertible investors have been mixed to start 2025. In the first quarter, outright funds had an average return of (4.0%), which mirrors the downward trend in the equity markets, with the Nasdaq ending Q1 down 8.3%. However, convertible arbitrage funds achieved average returns of 1.5% in Q1, outperforming both equity and fixed income markets. For stock-price neutral investors, the higher rates and credit spreads in Q1 have been partially offset by elevated volatility, and the convertible asset class remains well bid relative to other financing markets.

Personal Views: The views expressed in this report reflect our personal views.  This blog post is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such.  The information, opinions, estimates and forecasts contained herein are as of the date hereof and are subject to change without prior notification.  The large majority of reports by us are published at irregular intervals as appropriate in our judgment and ability to produce, so updates may not be made or available even when circumstances may have changed.

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