US convertible bond issuance has soared to an all-time high, surpassing all previous full-year totals as the tech sector seeks additional sources of capital to finance the AI build-out.
Convertible bonds are a form of corporate debt that pays interest but can later be converted into shares of the company’s stock. Year to date, the market has seen $135 billion of convertible bonds issued, with just under half of that supply so far this year coming from the AI industry, Goldman Sachs credit analyst Spencer Rogers wrote in a client note on Wednesday.
The vast majority of these offerings, Rogers said, have come from smaller issuers with high-yield ratings, but the Big Tech hyperscalers pouring capital into the AI infrastructure boom have begun to issue increasingly large amounts of debt.
Alphabet (GOOG), for example, issued $19 billion in convertible bonds in June, while Oracle (ORCL) issued a $5 billion tranche in February. This type of issuance from hyperscalers, Rogers said, can assist those companies with financing diversification and balance sheet optimization.
“Convertible bonds have long been an important vehicle for funding early-stage, growth-oriented companies, giving investors exposure to equity returns on the upside while sitting higher in the capital structure and having the benefit of bond-like risk if the growth doesn’t materialize,” Rogers wrote to clients.
“It should come as no surprise then,” Rogers wrote, “that over the last couple of years it has increasingly become a funding vehicle of choice for AI-focused companies.”
