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AI Breakthrough: Driving Convertible Bond Market to New Heights


Benjamin Hughes

March 6, 2024 - 15:27 pm


Artificial Intelligence Craze Ignites Convertible Bond Market Frenzy

In a dynamic shift that echoes the days before increased global interest rates, the excitement fueling the artificial intelligence (AI) sector has sparked an unusual interest in the bond market. Coined as a financial anomaly, investors are essentially paying to hold certain bonds, an investment behavior that appeared to have been laid to rest alongside lower interest rates.

Revival of a Market Rarity

Recent weeks have seen the yield on convertible bonds—securities that investors can exchange for a predetermined amount of the issuing company's equity on maturity—issued by companies in the semiconductor and microchip industries fall into the negative territory. This unusual market trend encompasses names like Hynix and Camtek Ltd, companies at the forefront of the semiconductor sector. This fervor among investors has been attributed to the massive rally in AI stock, which has propelled the S&P 500 to unprecedented heights this year.

The Convertible Bond Attraction

The resurgence in interest for zero-yield bonds, particularly in the AI domain, has ushered in vigorous market activities. At the center of this pivot is a calculated gamble on the continuous escalation of AI shares. Money managers have been scooping up bonds of leading chipmakers with renewed enthusiasm. A case in point is the zest for Super Micro Computer Inc.'s convertible bonds, which started at a zero coupon last month and have seen a yield decline to roughly -2.75%, as per the data aggregated by CBBT and reported by Bloomberg.

An investor at Jupiter Asset Management, Makeem Asif, underscores the sector's heat and demand spike for entities directly benefiting from AI's meteoric rise. Asif's investment move involved acquiring convertible bonds from Super Micro Computer Inc. and has been symptomatic of a broader trend that hints at the investor's confidence in the sector and the potential profits from an equity conversion.

Risks Behind the Curtain

However, the strategy of investing in convertible bonds without positive yields encapsulates a significant risk factor, as evidenced by the recent investment history. The absence of coupon safety nets can put an extensive strain on money managers, especially when the expected equity conversion becomes less likely.

During the pandemic, the tech hype enabled companies like Peloton Interactive Inc., Just Eat, and Snap Inc. to distribute convertible bonds with subzero yields. Due to the substantial disparities between their share prices and the conversion prices, these bonds are now categorized as "busted," indicating a slim chance of ever converting into equity.

One of the highlights of this phenomenon is Peloton's convertible bond, with its conversion price far outpacing the company's current stock price, raising questions about the real value of such investments.

AI Sector's Convertible Bond Rush

Within this bustling market, companies tied closely to the growth of AI have experienced a dramatic rise in investor interest. Super Micro Computer's equity has seen a monumental appreciation, and its impending induction into the S&P 500 Index only adds fuel to the fire. The convertible bond's over $1,341 conversion price stands as a premium to Super Micro's current stock price of approximately $1,090.

Additionally, BE Semiconductor Industries, also known as Besi, a Dutch company integral to AI through its hybrid bonding tools employed in high-performance computing and AI applications, stands out as an investors' darling. According to Florian Sager, a technology analyst at Stifel Europe Bank, the intense focus on Besi is rooted in the burgeoning orders and new clientele for its bonding tools—viewed as long-term growth catalysts.

In evidence of investor action, Besi’s convertible bond, maturing in April 2029, exemplifies the market's sentiments as its yield plunged to -7.5%. The current share price heavily overshadows the conversion price, reflecting intense confidence in the company's continuous advancement in the AI paradigm.

The Silver Lining for AI Companies

For those navigating the AI space, zero coupon convertible bonds are becoming increasingly attractive as vehicles for raising capital. With cutting-edge innovations on the line, companies find a willing cohort of investors aiming to support the sector's expansive growth trajectory. Pierre-Henri de Monts de Savasse, a portfolio manager at RBC Bluebay, suggests that this trend of zero coupon bonds could very well continue, given the capital-intensive nature of technological advancement in the AI industry.

Conclusion: An Era of Strategic Investment

This resurgent interest in convertible bonds, particularly within the AI and tech sectors, marks a new chapter in strategic investing. While the method comes with inherent risks, particularly when foregoing coupons, the opportunity to capitalize on the anticipated growth in AI equity remains an appealing prospect for many investors.

These market movements signify a robust confidence in the transformative impact of AI technologies and their incumbents. Despite the risking echoes of the past, where similar investment vehicles may have faltered, the lure of future gains continues to attract capital in the search for next-generation opportunities.

As with any high-stakes investment strategy, the balance between risk and reward remains a constant companion. For now, the revival of negative-yielding convertible bonds reaffirms the market's enduring intrigue and its readiness to embark on the path of AI-driven economic landscapes, with investors keen to be at the forefront of the next technological leap.

For further reading and detailed analysis, the original source material for this news article is available at Bloomberg.

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