AI financing fueling a surge in U.S. convertible bond sales?

* AI-linked firms drive surge in convertible bond issuance

* High rates, equity volatility boost appeal of convertibles

* Hedge funds, asset managers seek upside, even from riskier issuers

By Chibuike Oguh

NEW YORK, May 20 (Reuters) - Corporate America is tapping the convertible bond market at a record pace as companies linked to artificial intelligence drive a surge in demand for debt that often draws extra investor interest in hot markets because it can convert into equity.

U.S. convertible issuance reached about $34 billion in the first four months of 2026, more than double the same period a year earlier, according to Bank of America Global Research and Barclays Research. That start puts the market on track to surpass last year's full-year record of over $120 billion. Roughly half of this year's issuance is tied in some way to AI, underscoring how the technology is meeting both corporate funding needs and investor appetite. Companies are using convertible debt to fund data centers, power infrastructure and cloud expansion while also rolling over pandemic-era debt.

"A lot of it is to build out capital expenditure, particularly AI, and that's unusual and not something we've seen in previous cycles," said Michael Youngworth, managing director and head of global convertibles at Bank of America Securities.

Large deals include a $5 billion raise from Oracle, a $4 billion offering from cloud infrastructure firm CoreWeave (CRWV) , and $2.6 billion from Australia-based data center company IREN Limited (IREN).

Power companies and chip makers have also tapped the market: NextEra Energy (NEE) raised $2.3 billion while On Semiconductor amassed $1.3 billion.

A wave of refinancing is also contributing, analysts said, as companies roll over convertibles issued during the 2020-2021 pandemic-era boom, now approaching their typical maturity of five to six years. Recent refinancings include Duke Energy's (DUK) $1.5 billion offering and $900 million issued by Microchip Technology (MCHP).

MARKET APPEAL

In the current high-rate environment, where traditional borrowing is costly and equity issuance dilutes shareholders, convertibles have become particularly attractive for AI-focused companies financing large-scale investment.

Convertibles offer fixed-coupon payments like traditional debt but can be exchanged for shares if a company's stock surpasses a predetermined price. That conversion feature effectively embeds a call option on the issuer's stock, which rises in value with equity volatility, or larger swings in share prices.

The chance for such a payout means the bonds are sold at a lower rate than traditional debt. For instance, health technology firm Tempus AI (TEM), which uses AI to analyze clinical and genomic data in healthcare, raised $400 million from a six-year convertible with zero coupon and zero principal increase at maturity, it said.

The bonds will convert to stock if shares rise to $69.26, or about 40% higher than where the stock was when the issue was sold earlier in May.

Convertibles' dual appeal has helped sustain demand during this volatile, high-rate environment. Benchmark 10-year U.S. Treasury bond yields are at a 16-month high, raising borrowing costs in fixed-income markets.

RISKS AND LIMITS

Hedge funds and large asset managers dominate the convertible investor base, with hedge funds trying to capture relative value from the implied volatility embedded in convertibles, said Venu Krishna, managing director and head of U.S. equity strategy at Barclays.

Equity optionality is attractive for institutional investors looking at AI-related companies, where the potential upside is compelling even if underlying credit is weak.

Long-only investors are "buying for exposure to semiconductors - the hottest part of the market right now, driven by AI capital spending," Krishna said.

That demand has drawn a wider range of issuers into the market, including companies with riskier profiles than the headline names dominating AI expansion.

In January, WhiteFiber (WYFI) raised $230 million by selling a five-year convertible bond, with proceeds primarily for data center expansion.

The company, which went public in August 2025, has a negative forward P/E ratio of about 36. However, its share price implies an enterprise value of roughly 19 times forward EBITDA, according to LSEG, higher than its peers, suggesting investors are betting on strong growth in coming years.

Shares are up nearly 60% so far in 2026.

"The market has performed quite well and demand has improved, and all this has allowed corporates to come to the convert space at very attractive terms," said Youngworth. Companies are not necessarily coming for a specific need, "but because money is cheap."

(Reporting by Chibuike Oguh in New York, editing by Colin Barr and David Gaffen)