Convertible debt sold by high-flying US groups falls back to Earth

Worries about inflation and a pullback in tech shares have weighed down on convertible bonds

Joe Rennison and Aziza Kasumov

Twitter, Peloton and Airbnb took advantage of hot demand to issue convertible bonds just before sentiment changed © Montage of Twitter, Peloton and Airbnb logos


Investors have been jolted by a slide in the price of convertible bonds issued at the top of the market this year, as fears of higher inflation have pushed interest rates upwards and dented the debt’s value.

Marquee tech groups like Twitter, Peloton and Airbnb took advantage of hot demand to issue convertible bonds just before sentiment shifted. 

Convertible bonds are sold as debt but can be switched to stock should a company’s value increase to a specified strike price, meaning these securities can be affected by fluctuations in stock or fixed income markets.

The drops sustained by these convertible bonds illustrate how Wall Street investors are grappling with both the risk of higher price growth and mounting concerns that the tech trade that has generated outsized returns since the market trough in March 2020 has run out of steam.

“It’s a double whammy,” said Peter Sheehan, a credit strategist at Loomis Sayles whose multisector income fund has more than 6 per cent of its cash in convertible bonds, including deals from Twitter and Peloton.

Sentiment was so strong earlier this year that several companies managed to sell bonds with a zero coupon, meaning they do not have to pay interest on the debt, as well as a high strike price that reduces the potential of existing shareholders becoming diluted.

However, as inflation fears have stirred as the economy has rebounded, the prices of the convertible bonds have sunk, with higher interest rates eroding the value of the debt and the tech companies’ stock prices. 

These concerns have triggered an exodus from convertible bond funds. In the week to May 12, the category sustained the biggest outflows since November, with investors globally pulling a net $530m, according to data by EPFR. 



“What happened? 

Rates went higher and converts got slammed,” said John McClain, a portfolio manager at Diamond Hill Capital Management, who said he has been buying up the debt now that prices have fallen.

Peloton’s zero per cent coupon bond sold in February traded as high as 110 cents on the dollar, but has since fallen to just 93.5 cents. 

Airbnb’s bond from the start of March has fallen to 92.5 cents and Twitter’s convert sold at a similar time dropped below 90 cents this month before retracing slightly. 

All three notes mature in 2026.

In turn, this has pushed the yield on the converts higher. 

Twitter’s convertible bond now yields more than 2 per cent.

Higher Treasury yields have also put the stock prices of some of Wall Street’s once high-flying growth stocks, seen as more sensitive to tightening financial conditions, under pressure. 

When a company’s stock price declines, the strike price that needs to be reached for a convertible bond to be turned into equity moves further out of the money, making it less attractive for investors to hold the note.

The stock prices of Airbnb, Twitter and Peloton have slid at least 20 per cent since the beginning of March.

Nonetheless, issuance of new convertible bonds has remained at record levels, with companies selling more than $95bn in convertible notes globally this year through May 25, the highest for that time of the year since Refinitiv started tracking the data. 

More than $60bn has been issued in the past three months alone, with Coinbase bringing the latest blockbuster deal, at $1.25bn, to market just last week.

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