As part of our market update series, please see the summary below of what we saw in the convertible market in Q4 2021.
- New Issuance. Q4 2021 saw 27 new issue convertible deals (all debt) with a total volume of $18.1bn, which brought total 2021 issuance to $92.8bn across 155 deals. 2021 was the third busiest year on record, only trailing 2020 and 2007. November was particularly busy with $12.7bn of issuance across 18 deals; the second busiest month of the year. Q4 also saw 7 deals of size $1bn+ and an average deal size of ~$670mm, which is higher than the ~$580mm average size through the first 3 quarters of 2021.
Technology continued to dominate the market in Q4, accounting for 14 deals and $11.1bn of volume. Consumer Cyclical and Basic Materials sectors each also saw four issuances totaling $3.7bn & $1.4bn respectively. As expected, Technology companies were the most frequent issuers for the full year as well, responsible for 68 deals worth $48.5bn. Other notable sectors that tapped the convertible market in 2021 were Consumer Cyclical and Healthcare, adding $16.2bn and $8.1bn of volume.
- Terms. As seen below, terms overall in Q4 remained relatively unchanged from Q3. Additionally, 7 deals were priced with a 0% coupon in Q4, adding to the record-breaking amount of zero coupon convertibles in 2021.
The increase in market volatility as the Omicron COVID variant emerged in late November, and increased concern about inflation (and likely Federal Reserve rate hikes) resulted in December market sentiment being somewhat risk-off, with somewhat inferior terms to earlier in the quarter (December average 1.39% coupon / 36% conversion premium, on 8 new issues).
However, even with this adjustment convertible financing terms remain strong relative to long-run averages and an attractive alternative for issuers.
| Sector | 2019 | Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | Q1 2021 | Q2 2021 | Q3 2021 | Q4 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% |
1.20% / 38% |
|
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% |
0.45% / 40% |
| 2017 | 2018 | 2019 | 2020 | 2021 | |
|---|---|---|---|---|---|
|
All Deals |
83 |
110 |
114 |
180 |
155 |
|
Zero Coupon |
1 |
6 |
3 |
22 |
45 |
|
% of Zero-Coupon Deals |
1% |
5% |
3% |
12% |
29% |
- Pricing Results: Theoretical Value. We have updated the theoretical value graph below with Q4 data. The Q4 average was 101.4, which is slightly tighter than the 102 – 102.5% typical long run average. However, as discussed above, December proved to price wider on this metric. Because of the risk-off tone of the market, issuers that chose to move forward priced with slightly greater new issue concessions.
- Pricing Results vs. Price Talk. Per the below, 69% of deals were priced on the tight ends of the marketing range or better in October / November before pricing wider in December. While December was a softer month in the convertible market, pricing for deals was still balanced between investors and issuers.
- Day 1 Trading. On average, for the quarter, deals traded up 2.1 points on a stock-price adjusted basis on the first day of trading (2.4 points in October / November and 1.6 points in December), compared to a 1.7 point average for the first three quarters of 2021. The smaller trading performance in December is consistent with the risk-off mentality as investors held back in the secondary market as they did in marketing processes. All of these numbers, however, are within normal variations of the market.