As part of our market update series, please see the summary below of what we saw in the convertible market in Q3 2021.
- New Issuance. Q3 2021 saw 23 new issue convertible deals (22 debt & 1 mandatory) with dollar volumes of $15.0bn, compared to $17.0bn across 30 deals from Q2 2021 and $19.9bn across 39 deals in Q3 2020. More specifically, the majority of activity for the quarter came post labor day ($8.4bn across 14 deals), as issuers began to take advantage of a strengthening market before heading into black-out periods in October.
The technology sector continues to be dominant in the market, accounting for 11 deals (48%), while healthcare was next most frequent with 4 deals (17%). Other sectors that were represented this quarter include Industrials, Financials, REITS, and Consumer Cyclical & Non Cyclical.
- Terms. As done previously, we compare the average convertible coupons and conversion premiums throughout recent history to capture any underlying trends. As seen below, terms remained relatively consistent with Q2, and are still attractive from a historical perspective. In the second table, we display the amount of zero-coupon deals over the past five years. It is worth noting that 46 out of the 60 zero coupon deals in 2020 and 2021 came from Q4 ‘20 and Q1 ‘21, and although the market has been constructive around these issues recently (3 deals in Q3), non-hedge investors continue to prefer yield amid the unprecedented zero coupon supply.
| Sector | 2019 | Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | Q1 2021 | Q2 2021 | Q3 2021 |
|---|---|---|---|---|---|---|---|---|
|
All Deals Avg. |
2.20% / 30% |
1.25% / 37% |
2.53% / 29% |
2.10% / 34% |
1.14% / 38% |
0.89% / 41% |
1.15% / 35% |
1.23% / 37% |
|
Tech Sector Avg. |
1.30% / 34% |
1.04% / 37% |
1.60% / 31% |
1.22% / 39% |
0.24% / 45% |
0.15% / 46% |
0.34% / 39% |
0.58% / 42% |
| 2017 | 2018 | 2019 | 2020 | 2021 YTD | |
|---|---|---|---|---|---|
|
All Deals |
83 |
110 |
114 |
180 |
118 |
|
Zero Coupon |
1 |
6 |
3 |
22 |
38 |
|
% of Zero Coupon Deals |
1% |
5% |
3% |
12% |
32% |
- Pricing Results: Theoretical Value. We have updated the theoretical value graph below with Q3 data (combined July and August given only one deal in July). Again, the theoretical value shows how much the typical deal was “worth” in a convertible value model based on the banks’ credit and volatility assumptions. The Q3 average of 102.3 was in-line with the 102 – 102.5% typical long run average on this metric. Additionally, it is positive to see that the surge of supply in September was met with great investor receptivity, as deals priced much tighter on a theoretical value basis.
- Pricing Results vs. Price Talk. As expected, not only did deals begin pricing on a tighter theoretical basis, but also more commonly priced toward the “Issuer Friendly” side of the marketing range. The two marketed deals that priced toward the “Investor Friendly” end of the range came during the first true week of issuance in September, representing how the market strengthened throughout the month.
- Day 1 Trading. On average, for the quarter, deals traded up 2.0 points on a stock-price adjusted basis on the first day of trading (1.8 points in July / August and 2.1 points in September), compared to an average since May 2020 (post COVID) of ~1.7. This does signify that issuers left slightly more money on the table in September than they did earlier in the quarter. However, it may mean that price talk ranges set by issuers and banks “lagged” the strength of the market: investors were slightly more receptive to new issuances than the issuer side expected. Thus issuers this coming quarter may be able to tighten terms into the strength if it continues.
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