Tech Bear Market’s Latest Casualty Is Pandemic-Era Convertible Debt

The equity-linked debt of some of the pandemic’s darlings has plunged to record lows and is now considered distressed.

The convertible bonds of Peloton Interactive Inc., Ocado Group Plc, Just Eat Takeaway.com NV are trading between 45 cents to 75 cents on the dollar or euro -- levels that are considered distressed territory by debt investors.

It’s a dramatic turnaround from the frothy heights of 2021, when investors were clamoring for fast-growing technology stocks. Companies across the consumer cyclical and tech sectors sold a record $157 billion of convertible bonds -- debt that can be converted into shares -- in 2020 and 2021.

“This debt was issued when market sentiment was very positive and yields were very low, so there was a real rush to get exposure,” said Pierre-Henri de Monts De Savasse, a portfolio manager at BlueBay Asset Management LLP. “But equities corrected and some of these names were in the tech or tech-like sector with high multiples, so they corrected enormously.”

The bonds from those companies paid little or nothing in the way of interest, so the big attraction for investors was the ability to exchange the securities for stock, assuming the shares rallied enough to surpass the conversion price.

But then the bear market happened, and the stocks are trading at a fraction of their previous highs. When the debt matures, the companies will face two options: find the money to pay back the debt or trigger the conversion, which may cause a massive dilution of existing shareholders.