SBI Holdings, a prominent Japanese financial services company, made headlines in the convertible bond market with the launch of dual-tranche ¥40 billion convertible bonds (CBs) in August 2017. These bonds were intended for refinancing an existing CB, funding buybacks, and creating new investment opportunities.
SBI Holdings’ exposure to Ripple’s XRP has played a significant role in boosting its performance. During a time when the equity of the company surged by over 60% due to the global enthusiasm surrounding cryptocurrencies, SBI’s 8.7% stake in Ripple’s XRP proved to be invaluable. This stake in XRP has also positively impacted the performance of SBI’s CBs.
However, SBI’s association with Ripple is just a small part of the broader narrative in the convertible bond market. There has been a resurgence in this market, characterized by an increase in smaller issuances, primarily from the US. In fact, the issuance volume in the convertible bond market has grown by 28% year-on-year.
The first quarter of 2018 saw a ten-year high in primary activity in the convertible bond market, with a total of 67 issues launched, amounting to $26.8 billion. Factors such as rising interest rate expectations and renewed optimism in equity markets have revitalized this asset class.
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SBI Holdings is not the only company benefiting from this trend. Square Inc, a US payments provider, also issued a $440 million, 5-year CB to fund its growth initiatives, resulting in a contribution of +47 basis points.
Although there have been challenges, such as the downturn faced by Steinhoff, a significant investment-grade rated issuer, due to accounting irregularities, the diversity and strength of the convertible bond market have ensured a steady recovery.
Looking ahead, the convertible bond market is expected to continue growing. Several factors contribute to this optimism. CFOs are keen on capitalizing on the high equity returns in the current market. As interest rates rise, convertible bonds become more appealing to companies as they help reduce financing costs. The recent US tax overhaul has also made convertible bonds more attractive compared to traditional bonds. Lower corporate tax rates and simplified overseas cash repatriation procedures may fuel M&A activities, leading to more deal-related issuance. Additionally, with a projected global increase in capital expenditure driven by the aim to achieve higher returns against rising rates, convertible bonds could see further growth.
The recent performance of major players like SBI Holdings and their ties to influential cryptocurrencies like Ripple further indicate that the convertible bond market is entering an exciting phase.
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