💃 Paris Fashion Week: starring Coty

What’s going on here?

Top US companies are turning to an unexpected source to borrow, diving into the convertible bond market – typically the stomping ground for junk-rated firms.

What does this mean?

Think of a convertible bond as the asset you’d get if a stock and a bond had a baby. Like any bond, a convertible pays interest to its holder, but unlike the old-school versions, it can be swapped for stock at a later date. Now, because of that sweetener, these convertible bonds pay less in interest – and that allows firms to borrow more cheaply without immediately watering down the value of their stock, as issuing brand-new shares would.

If this sounds familiar, that’s because these kinds of bonds have been around for a while, but have been mostly issued by lower-quality firms. However, with interest rates so much higher now, these bonds are becoming popular among the high-quality, investment-grade set. In fact, those companies have sold $12 billion in convertible bonds this year, or more than 30% of the total. That’s triple the usual rate.

Why should I care?

Zooming in: Cheaper, not cheap.

The average yield on investment-grade corporate bonds has nearly tripled over the past two years to 6%. And, sure, companies can save 2 to 3 percentage points on their interest rates by issuing a convertible instead of a traditional bond. But, any boost to their stock prices from those savings might be offset by the dilution that occurs if the bonds are converted into shares.

The bigger picture: Fond of the bond.

About $2.3 trillion of corporate debt is set to mature each year between 2024 and 2026. A lot of it will have to be refinanced. And even if firms lean more heavily toward cheaper convertible bonds, they’re still going to feel the impact of higher rates on their bottom lines – and it won’t bode well for their stock values.

What’s going on here?

US beauty company Coty said it’s planning to sell 33 million new shares, laying the foundation for a dual stock listing in Paris.

What does this mean?

The New York-listed cosmetics firm is hoping that a presence on the French exchange will improve its looks among beauty-focused investors. At the current price, the share sale would raise more than $370 million for the maker of CoverGirl, Rimmel, and Kylie Cosmetics. And that’s money the company says it’d use to pay down debt and expand the business. The firm’s been dealing with some unsightly issues: mostly heavy debt and some management churn. But things have become better-looking under the current CEO, hired in 2020 to makeover the business.

Why should I care?

For markets: It’s always had Paris.

Coty was founded in 1904 in Paris, so the dual listing would take the beauty brand back to its (perfectly dyed) roots. But there’s much more to this move than just homesickness. See, most of the world’s biggest luxury goods and beauty companies – LVMH, L’Oréal, Hermès, and Kering – are listed in the French capital. That means Europe has a wealth of analysts and investors with in-depth knowledge and appreciation of the industry. So, for Coty, the move means being able to tap into pools of investors with high sector expertise, which could lead to a higher valuation.

The bigger picture: Beauty is looking good.

Coty’s share sale comes at a time when the industry is seeing a post-pandemic boom as customers splurge on smaller luxuries like fragrances and cosmetics. And the CEO of L’Oréal – the world’s biggest beauty company – says the change is more than skin deep. With the rise of the middle class around the world, an increased appetite for pricier premium products, and a customer base that’s stretching beyond women and young people, he’s predicting that the beauty market will grow to $427 billion by 2030, from $288 billion today.