NEW YORK (Reuters) – U.S. issuance of convertible bonds in May hit a document excessive of $20.7 billion, in keeping with Bank of America information, as corporations combating the influence of the coronavirus pandemic ventured into the one-time area of interest market in search of cheaper and simpler methods to borrow cash. FILE PHOTO: Quite a few grounded Southwest Airways Boeing 737 MAX eight plane are proven parked at Victorville Airport in Victorville, California, U.S., March 26, 2019. REUTERS/Mike Blake/File PhotoConvertible bonds, sometimes widespread in tech and healthcare, noticed the likes of Southwest Airways (LUV.N) and cruise line Carnival (CCL.N) come to market with the second and third largest offers of the yr, in keeping with Dealogic information. This wave of issuance has been met with elevated demand from conventional debt and fairness buyers with much less expertise available in the market, on high of typical inflows, convertible bond specialists mentioned. “We have seen a pickup in demand from non-traditional convert investors,” mentioned Michael Youngworth, head of convertible bond technique at Bank of America. “I’ve received lots of calls from either traditional credit investors or some traditional equity investors who are looking to get into converts now.” The distinctive construction of the debt permits buyers to guess that the price of the stock will rise considerably, normally inside 5 years. That has attracted buyers trying to place themselves for an eventual financial restoration. “To the extent there is a downturn again, you’re safer being in the convertible tranche than the equity tranche,” mentioned Santosh Sreenivasan, head of equity-linked capital markets for the Americas at JPMorgan. About $20.7 billion in new U.S. convertible debt was issued in May, in keeping with Bank of America, the best month-to-month quantity on document. The earlier excessive was $19.2 billion in May 2001. Past its enchantment as a restoration commerce, buyers have been drawn to the market’s valuations and return. The price of the iShares Convertible Bond ETF (ICVT.Z) is up 6.49% this yr, whereas the S&P 500 index .SPX has fallen 5.24%. The convert market has additionally been a refuge for fairness buyers, mentioned Joe Wysocki, who manages the long-only convertible fund at Calamos Investments. “You’re seeing companies cut dividends. As an equity investor, convertibles allow you to stay invested, to keep the equity upside,” mentioned Wysocki. Convertible debt is a hybrid safety, providing an everyday mounted payout like a bond, whereas giving bondholders the suitable to commerce their debt for fairness if shares rise over a sure price. Whereas the opportunity of an fairness payout is drawing new buyers in, bankers promoting issuers on this construction are highlighting the slim possibilities of a conversion, in keeping with banking sources who declined to be named as a result of they weren’t approved to talk to the media. Banks started pitching convertible offers early the pandemic, after plummeting stock values floor fairness issuance to a halt. Since then the product has turn out to be the most important supply of payment development for fairness bankers, in keeping with Refinitiv information. Convertibles have made up 34% of U.S. fairness offers up to now this yr, up from 19% final yr. The offers had been seen as an answer for corporations who wanted cash however didn’t need to promote shares at decrease valuations, bank sources mentioned. The power to problem debt in a zero rate of interest surroundings, and the slim probability the debt could be transformed into fairness was engaging to corporations, these bankers mentioned. Convertible offers are sometimes structured so the stock would want to rise 75% to 100% earlier than buyers may convert, a bank supply mentioned. Desperation for cash, nevertheless, has led issuers to make some concessions. Conversion premiums – the quantity the conversion price exceeds the present share price – have been falling, in keeping with Wysocki. “That’s good for investors like ourselves because you’re paying less of a premium so the chances of that getting in the money are higher,” Wysocki mentioned. Reporting by Kate Duguid and Imani Moise. Extra reporting by Joshua Franklin. Enhancing by Megan Davies and David GregorioOur Requirements:The Thomson Reuters Belief Rules.