‘Convertibles: from Nebius to Legrand and Kering – three ideas to watch’
‘Opportunities in AI, data centres and the luxury sector. But the quality of issuers and market concentration call for rigorous selection’
Key points
Capitalising on share price rises whilst maintaining a bond buffer during downturns. This is the promise of convertible bonds, which are also attracting attention due to their increasing use by companies in the artificial intelligence (AI) sector. However, the boom in new issues makes it all the more important to distinguish opportunities from risks, from technological concentration to the financial strength of issuers. Nicolas Crémieux, head of convertible bonds at Mirabaud Asset Management, explains how to navigate the market and where to look for opportunities beyond the tech sector.
The markets are facing a complex situation. How do you assess it, and what might cause the trend to reverse?
It is a supply-side shock that is turning into a test of credibility. The surge in energy prices linked to the conflict in the Middle East has pushed inflation back above 3 per cent, and both the Fed and the ECB have resumed rate rises. With resilient growth and high deficits, the markets are pricing in higher interest rates for longer. A change of course would require a de-escalation capable of bringing oil prices down, or clear signs that the labour market is cooling. Until then, volatility remains our base case scenario.
Government bond yields are also rising. What outlook do you see?
With the 10-year Treasury yield above 5 per cent – its highest level since 2007 – and the Bund at a 17-year high, much of the monetary tightening is already priced in. However, the premium required to hold long-dated securities could rise further, as long as deficits remain to be financed and inflation surprises on the upside. We expect a period of volatility rather than a reversal of the trend. On the upside, bonds are once again offering attractive yields. For convertible bonds, higher yields can bolster the value of the bond component. Furthermore, issuers can save several percentage points on coupon payments each year compared with traditional debt.
Companies in the artificial intelligence sector are increasingly turning to convertible bonds. How is the market changing?
The impact is already evident. Global issuance reached a record $147 billion in the first eight months of the year, with almost half of this linked to AI. The flip side is concentration: these securities account for around 31 per cent of the global market, pushing indices towards behaviour more akin to that of equities. Furthermore, there is a proliferation of zero-coupon issues from companies with weaker credit ratings. Convertibles remain one of the best ways to invest in this sector, but only with rigorous selection.
In 2026–2027, the market faces a ‘wall of maturities’. What consequences do you expect?
Over the next two years, approximately $115 billion worth of convertible bonds – issued mainly in 2021 with coupons close to zero – will need to be repaid or refinanced. For sound companies, this means a wave of new issues with more attractive coupons and more balanced terms. The pressure is concentrated on weaker issuers, whose share prices have fallen sharply: refinancing at current rates is costly. Credit quality analysis therefore becomes crucial.
