(Bloomberg) – Debt linked to the stocks of some of the pandemic darlings has plunged to record lows and is now considered to be in trouble.

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Convertible bonds from Peloton Interactive Inc., Ocado Group Plc, Just Eat Takeaway.com NV are trading between 45 cents and 75 cents on the dollar or euro – levels seen as troubled territory by debt investors.

It’s a dramatic turnaround from the frothy highs of 2021, when investors clamored for fast-growing tech stocks. Companies in the consumer discretionary and technology sectors sold a record $157 billion in convertible bonds — debt that can be converted into equity — 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 for exposure,” said Pierre-Henri de Monts De Savasse, portfolio manager at BlueBay. Asset Management LLP. “But stocks corrected and some of those names were in the tech sector or tech with high multiples, so they corrected tremendously.”

The bonds of these companies paid little or no interest, so the main attraction for investors was the possibility of exchanging the securities for shares, assuming that the shares rallied enough to exceed the price of conversion.

But then the bear market happened and stocks are trading at a fraction of their previous highs. When the debt comes due, companies will be faced with two options: find the money to repay the debt or trigger conversion, which can lead to massive dilution of existing shareholders.

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For example, Peloton’s $1 billion zero-coupon bonds convert at around $239 per share. With the stock trading at around $10, investors have no incentive to convert when the bonds mature in February 2026 unless they stage a remarkable rally.

Investors don’t seem convinced that’s possible: the bonds are trading at 66.5 cents on the dollar, translating into a record yield of around 11.5%, meaning refinancing will prove costly.

It’s a similar story for Ocado and Just Eat Takeaway, as well as financial firms SoFi Technologies Inc., Zip Co. and Affirm Holdings Inc. They all have zero- or low-coupon convertible bonds trading at 45 cents to 75 cents. cents and returns of 10% and more.

This puts the market in trouble, said Andrew Feltus, US co-chief executive of high yield at Amundi SA. “It’s been since the early 2000s that we’ve seen such a gap” between conversion prices and stock prices, he said.

Ocado spokespersons declined to comment on the convertible bonds while Peloton, SoFi and Affirm did not immediately respond to a request for comment.

A Zip spokesperson said the company “has tightened its reach in response to a change in external market conditions” and remains engaged with its bondholders to ensure they are aware of the “relevant developments”. Just Eat pointed to its March 2 income statement, in which it said the company’s debt maturities are “well aligned” with expected improvements in profitability, and that it has a strong cash position. Treasury.

Investors bought convertible bonds from cyclical technology and consumer companies at a record pace during the pandemic. Emissions hit a record high in 2021 at $79.5 billion, surpassing 2020’s $77.5 billion, according to data compiled by Bloomberg.

The advantage for companies is that investors are usually willing to accept a lower interest rate or coupon in exchange for the option to exchange debt for equity at a later date at a fixed price.

Market concern

Most of this debt matures between 2024 and 2027, giving companies time to prepare for this issue and shift market sentiment. But while economists predict central banks will stop raising interest rates if the global economy slows, market prices suggest rates won’t be anywhere near the lows they were in 2020 and 2021.

The strongest companies will be able to stage a takeover or come up with a refinancing program, said Howard Needle, portfolio manager at Wellesley Asset Management Inc.

“A company like SoFi or Affirm probably has a lot of ways to generate cash, or the stock can appreciate to the point where it looks healthier,” he said. “But there are a host of companies that traded their debt in the 1930s and 1940s where there is real market concern.”

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