Tech groups find a new way to monetise AI hype: selling volatility

{"text":[[{"start":4.3,"text":"When it comes to the most desirable parts of the AI investment story, attention naturally falls on chips, data centres and productivity-enhancing tools. But big technology companies are also selling another hot property: the gyrations in their own shares."}],[{"start":19.9,"text":"Large swings in the share prices of even the biggest companies are becoming unremarkable in their frequency. Take Broadcom as an example. The $2tn semiconductor star’s stock fell as much as 15 per cent on Thursday after it said revenue for the current quarter would be slightly below what analysts expected. Earlier this week, rival Marvell’s shares jumped 33 per cent; a few days earlier, so did laptop and server maker Dell."}],[{"start":44.3,"text":"Such volatility is of great value to one group: hedge funds who specialise in convertible bonds. Convertibles are a combination of a low-coupon, fixed-income security and an option to buy stock in a company at a price well above its value at issuance. In effect, they represent an option, and the more volatile the issuer’s stock, the more valuable that option becomes."}],[{"start":66.9,"text":"Tech companies are, understandably, taking advantage of their increasingly unpredictable share prices — and the robust animal spirits of Wall Street in general. Convertible bond issuance has already reached $56bn this year so far, which means it is on course to match or exceed the record annual total of $120bn in 2025, according to Barclays Research. "}],[{"start":89.05000000000001,"text":"An example is CoreWeave, a data centre upstart with a market capitalisation of nearly $60bn. In April it sold a convertible with a 1.75 per cent coupon, compared with the 10 per cent it pays on a traditional bond it sold at the same time. The hybrid instrument’s conversion premium of 30 per cent has now shrunk to 10 per cent after the ensuing jump in CoreWeave’s shares."}],[{"start":null,"text":"

"}],[{"start":113.60000000000001,"text":"For convertible bond arbitrageurs, where the issuer’s stock actually goes isn’t very important, since they hedge against all but the volatility in that option. The typical return is modest, at perhaps 5 to 10 per cent annually, but is also uncorrelated with the rest of the market. For them, the best outcome is that the stock continues to bounce around."}],[{"start":134,"text":"Problems occur when that volatility is strictly on the downside. In 2020 and 2021, a series of seemingly promising companies took advantage of the pandemic pandemonium to not just issue convertible bonds but those that offered no interim coupon payments at all. "}],[{"start":150.9,"text":"Some fared well, like Airbnb, gambling group DraftKings and fast-food outlet Shake Shack. But then there were the likes of fitness specialist Peloton, faux-meat maker Beyond Meat and from-home dentist Smile Direct Club, whose distress left convertible bondholders with major losses."}],[{"start":169.3,"text":"The class of 2026 may be luckier. Certainly, AI is likely to be a more robust trend than indoor cycling or pea-based burgers. But elevated convertible bond issuance is, at heart, a response to the market being twitchier than usual. That alone should tell investors to be cautious."}],[{"start":194.00000000000003,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1780630830_1818.mp3"}