Transcript: Convertible bonds are so hot right now

This is an audio transcript of the FT News Briefing podcast episode: ‘Convertible bonds are so hot right now’

Sonja Hutson
Good morning from the Financial Times. Today is Thursday, January 4th, and this is your FT News Briefing.

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The Federal Reserve reinforced that it’s committed to higher for longer interest rates. And convertible bonds are having a moment. Plus, convicts in Russia are being released early after fighting in Ukraine. 

Polina Ivanova
One of the most terrifying things, of course, is for victims, for example, of abuse at home, domestic abuse, where the victim is worried for her own safety or for their own safety. 

Sonja Hutson
I’m Sonja Hutson, in for Marc Filippino. And here’s the news you need to start your day. 

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The Fed released the minutes from its December meeting yesterday. Turns out that most officials wanted to keep interest rates high, quote, for some time. Markets had priced in an interest-rate cut as early as March. These minutes might be a sign that’s a little too optimistic. But they also showed that most Fed officials did expect to cut rates sometime in 2024 and sounded more confident about inflation falling.

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There’s a rare bright spot these days for corporate fundraising, and it comes in the form of convertible bonds. US companies have been diving headfirst into the market. Just take this stat. The issuing of convertible debt increased by nearly 80 per cent last year, and the trend looks likely to continue into this year. Here to explain why is the FT’s Harriet Clarfelt. Hi, Harriet. 

Harriet Clarfelt
Hi. 

Sonja Hutson
So first things first before we get into this. What are convertible bonds? 

Harriet Clarfelt
That is a good question. A convertible bond is a type of bond, basically a type of debt that can be swapped for shares if a company’s stock price hits a pre-determined level. And to give you an example, Uber, the car-sharing giant, issued its $1.5bn convertible in November at an interest rate of less than 1 per cent. 

Sonja Hutson
Yeah, and obviously regular interest rates in November definitely were not coming in at 1 per cent. So, Harriet, I’m assuming that these super-low interest rates are what’s making this convertible market so popular right now. Right? 

Harriet Clarfelt
That is right. Convertible bonds are attractive to corporate borrowers because they typically have a lower interest rate than conventional bonds. So if we take a step back, US interest rates have risen pretty rapidly since March 2022 when they were near zero. They’re now sitting in a range of 5.25 to 5.5 per cent, and that’s after the Federal Reserve essentially attempted to tackle inflation in the US. What that has meant in turn, is that corporate borrowing costs have really escalated. If you can cut your borrowing costs by issuing a convertible bond, it seems like a pretty attractive option. And it depends by industry and by company. But companies can take 2.5 to 3 percentage points off their borrowing costs by issuing a convertible bond instead of a conventional one. So for some companies, it works really well. 

Sonja Hutson
All right. So that’s why companies might be interested in these bonds. But what about investors? I mean, a lower yield doesn’t really sound like a great option for them. 

Harriet Clarfelt
From an investor’s perspective, convertible bonds can, for some companies and some industries, give them some downside protection. You know, if the company’s share price does not continue to rise, they at least still get the income from the convertible bond, although it is less income. So it’s a bit of a gamble from an investor’s perspective. You sort of hope that the company’s share price is gonna continue to rise and at some point your convertible bond will swap into equity and then, yeah, you’re a shareholder, but at least you know that if that doesn’t happen, you will still get a bit of yield from your bond. 

Sonja Hutson
So, Harriet, convertible bonds are the hottest thing in commercial fundraising right now. But do you think that that’s gonna continue? 

Harriet Clarfelt
I think that’s a really good question. Certainly the bankers and lawyers and analysts we’ve spoken to thinks this is a trend that’s going to persist. And that is partly because we’ve seen this broader range of companies issuing convertible bonds in the past year. So historically, it was biotech, sort of slightly speculative companies that potentially couldn’t access conventional bond markets, who issued convertible bonds. But now you’re seeing much more established companies, Uber being one example, big utilities companies being other examples, issuing convertible bonds. There’s an argument that they’ve got a taste for this type of instrument and they’ve seen the benefits of it. And even if interest rates start to fall, it could still seem attractive. You know, it’s gonna take a while for interest costs to fall significantly. So for now, it sounds like people think it’s here to stay. 

Sonja Hutson
Harriet Clarfelt is a US capital markets correspondent for the FT. Thanks, Harriet. 

Harriet Clarfelt
Thank you. 

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Sonja Hutson
Two bombs killed more than 100 people in southern Iran yesterday. The blast went off during a ceremony marking the anniversary of an important military commander’s death. Qassem Soleimani was assassinated by the US in 2020. The attacks are the deadliest in the Islamic republic in decades and come during a time of high tensions in the region because of the war in Gaza. As of Wednesday evening, Tehran had not blamed a specific group or country for the attack, and no one had claimed responsibility. Iran’s leaders promised to retaliate.

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Some Russians convicted of gruesome crimes are returning to their communities after fighting in Ukraine. Thousands of prisoners were pardoned in return for military service and had to serve six months in exchange for their freedom. I’m joined now by the FT’s Polina Ivanova. She covers Russia. Hi, Polina. 

Polina Ivanova
Hi. 

Sonja Hutson
OK. So these Russian prisoners that were let out to fight in the war — how did this deal come about and what are some of the details? 

Polina Ivanova
Right. So initially it was Yevgeny Prigozhin. He was the head of the Wagner militia, and he was the first to do this. And he would gather prisoners around him in a courtyard and offer them this deal, come fight in the Wagner battalion in eastern Ukraine, right on the front line. If you survive, you win your freedom, you get a presidential pardon. And a huge amount of people took this deal. And then since Prigozhin’s death in August last year in the famous incident when his plane exploded, that process has continued and prisoners get this offer. And if you survive, you then get a pardon and you’re released. 

Sonja Hutson
And how do the survivors’ and victims’ families feel about this? 

Polina Ivanova
Of course, they’re completely horrified. Some of these crimes were very recent. You know, the family goes through that whole process of trauma and grief and seeing the trial take place and then subsequently find out, you know, a year later that their 20-30 life sentence is over and they’re free to return to the same communities. One of the most terrifying things, of course, is for victims, for example, of abuse at home, domestic abuse, where the victim is worried for her own safety or for their own safety. The perpetrator returns back to that community and starts seeking out the same victims once again. So those reports have been collected by Russian lawyers. One told me that she’s actually helped several women take themselves and their children out of the country because they’re so worried about perpetrators of crimes coming back to their communities. 

Sonja Hutson
So Russia also drafted lots of people. They conscripted lots of people to fight in Ukraine. But those people who were conscripted did not get this six-month deal that the prisoners got. They have to be part of the military indefinitely. Why is there that disparity? 

Polina Ivanova
It’s a very good question. You’re right to point out this discrepancy in many ways. Families have also noticed this. And especially now that it’s been over a year since the conscription, sort of mobilisation wave happened. We’ve seen an angry response from relatives of people who are still serving, saying, how come these convicts get to return home after six months? Whereas, you know, my husband or brother or father or whatever is still fighting a year on and it’s unclear when or how they will even get a break, let alone be released from service. So there is this kind of simmering movement. Of course, it was small. There’s not much of a protest movement ever in Russia, but these little kind of bursts of activity happened last fall. 

Sonja Hutson
Does the way that this is all played out tell us anything about how the Russian government, Russian society, views the justice system and views war? I mean, is there a bigger picture takeaway here? 

Polina Ivanova
Well, one thing that victims’ families take away from it and lawyers as well, is that the government is siding with murderers and rapists and killers, siding with violent people because it is getting bodies into trenches to fight for the state. So it’s siding with them. And activists talk about how this is kind of a common experience. You know, they extrapolate and say that, for example, the regime is held together by a single staple of violence and that the regime always supports the abuser. 

Sonja Hutson
Polina Ivanova covers Russia for the FT. Thanks, Polina. 

Polina Ivanova
Thank you. 

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Sonja Hutson
You can read more on all these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news. 

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