Hung Convertibles in 2025: Risks, Trends, and Investor Insights

When the world of capital markets gets jittery, unusual financial phenomena tend to surface. In 2025, one term has been making rounds among bankers, investors, and market-watchers alike: hung convertibles. Once a rare occurrence, these deals are now a clear barometer for market risk and investor sentiment. But what exactly are hung convertibles, why do they matter, and what should Australian investors know as the trend heats up?

What Are Hung Convertibles?

At its core, a convertible bond is a hybrid security: it starts as debt, but investors have the option to convert it into equity under certain conditions. Companies issue convertibles to raise capital, often at a lower interest rate than traditional bonds, because of the equity kicker. Under normal circumstances, investment banks underwrite these deals and quickly sell them to institutional investors.

A hung convertible occurs when the banks can’t sell the full allocation to investors after launch. Instead, they’re left holding unsold bonds—sometimes for weeks or even months—on their own balance sheets. This can tie up billions in capital and, in extreme cases, force banks to offload the bonds at a discount, triggering volatility in both debt and equity markets.

Key points about hung convertibles:

• They signal waning investor appetite for riskier or more complex debt.

• Hung deals can strain bank capital and confidence in the issuer.

• They often arise during periods of market uncertainty or when a deal is perceived as aggressively priced.

Why Hung Convertibles Are Back in Focus in 2025

After a muted few years, 2025 has seen a sharp uptick in hung convertibles globally, including in Australia. Several forces are at play:

• Rising Rates: With the RBA maintaining a hawkish stance and global central banks still battling inflation, investors have become more selective about credit risk and duration.

• Equity Market Volatility: Choppier stock markets in 2025 mean the potential upside from conversion is less appealing, especially if share prices are trending sideways or down.

• Deal Overload: Companies, eager to lock in funding before rates rise further, have flooded the market with new issuance. Not all deals can find a natural buyer base at the same time.

One recent example: In April 2025, a major ASX-listed tech firm attempted to raise $500 million via a convertible bond. Despite high initial interest, tepid secondary market demand saw $120 million remain unsold on the books of several underwriters. The bonds ultimately had to be repriced and offered at a steeper discount, rattling confidence in the sector and raising questions about pricing discipline.

Risks and Opportunities for Australian Investors

For retail and institutional investors, the emergence of hung convertibles presents both challenges and potential opportunities. Understanding these dynamics is crucial for anyone considering exposure to convertible bonds or affected equities.

• Liquidity Risks: Hung deals can result in less liquid secondary markets, making it harder for investors to exit positions at a fair price.

• Pricing Pressure: When banks offload unsold convertibles at a discount, it can depress prices for similar securities and the issuer’s shares.

• Signal of Broader Credit Tightening: A spike in hung deals often precedes wider credit market stress, serving as a warning sign for risk assets.

On the flip side, sophisticated investors may find value in distressed convertibles, provided they have the risk tolerance and patience to navigate volatile markets. Key considerations for 2025 include:

• Carefully assessing the issuer’s fundamentals and debt load

• Watching for oversold securities with strong underlying businesses

• Monitoring RBA policy and broader credit conditions for signs of a rebound in demand

What’s Next? Market Outlook and Practical Takeaways

With regulatory scrutiny on bank capital adequacy and a changing macro landscape, the prevalence of hung convertibles could reshape how deals are structured and marketed in Australia. Issuers may need to offer more investor-friendly terms or seek alternative financing channels. For investors, heightened due diligence and a focus on liquidity are more critical than ever.

As the rest of 2025 unfolds, keep an eye on:

• Trends in convertible bond issuance and pricing

• Shifts in underwriting standards among major Australian and global banks

• Policy updates from the RBA and APRA affecting capital markets

Hung convertibles are more than just a technical blip—they’re a window into investor psychology and market health. Whether you’re seeking opportunity or aiming to avoid pitfalls, understanding this trend is essential for navigating Australia’s evolving investment landscape.