The recent $1.9 billion convertible bond issuance by PG&E (PCG), upsized from an initial target of $1.5 billion, marks a significant moment in the revival of the US convertible bond market. This offering, the largest since Lucid Group (LCID) $2 billion issue in December 2021, underscores a growing trend among companies to capitalize on the opportunity to refinance debt at lower costs. The resurgence in convertible bond issuances is a clear indicator of the market’s renewed vigor, with 2023 witnessing three of the five largest convertible bonds in the past two years.
The total volume of US equity-linked issuances in 2023, reaching $51.3 billion, has already surpassed 2022’s full-year total by a significant 73%. This surge is fueled by a combination of rallying equity markets and expectations of reduced US Treasury yields in anticipation of potential rate cuts in the coming year. Companies are seizing this window of opportunity, as evidenced by PG&E’s upsized offering and Uber Technologies (UBER) recent $1.73 billion convertible bond issue before Thanksgiving. "The convertible investor base remains hungry for new paper," observes Barry Gewolb, CEO of HudsonWest.
However, the approaching holiday season is creating a narrow timeframe for issuers, prompting a rush to secure financing before potential market volatility. Key economic events in mid-December, including consumer price index data and the Federal Open Market Committee’s rate decision, are influencing this expedited timeline. Convertible bonds present a lucrative refinancing option for companies, with PG&E set to save approximately $75 million annually by prepaying loans at a lower interest rate.
PG&E’s strategy involves using the newly raised capital to significantly reduce the loans under a $2.75 billion credit agreement, highlighting the financial benefits of accessing convertible markets. This move, coupled with the announcement of its first dividend payment in six years, signals PG&E's robust efforts to restore its financial health post-bankruptcy. The convertible bond market's resurgence not only offers companies like PG&E financial leverage but also demonstrates their capability to attract large capital pools at favorable rates.
