US equity-linked bond issuers are increasing leaning toward zero-coupon offerings this year, as they seek to capitalize on strong equity prices and high investor enthusiasm that have much such terms more palatable.

A zero-coupon structure, long part of the convertibles toolkit, has gained fresh momentum this year as issuers look to preserve cash, avoid paying interest in a high-rate environment, and present a disciplined financial profile.

A combination of strong equity performance and a fully open convertible market helps make zero-coupon papers more achievable across a broader set of issuers, and less of an issue in the eyes of investors.

Frank Timons, CEO of Pier 88 Investment Partners, said receptiveness to the structure is often driven by the broader market environment. “When the equity setup is right, you can sell the upside,” he said. “Zero-coupon deals work best when investors feel like there’s a real path to conversion.”

Among the most notable 2025 deals, DoorDash’s USD 2.75bn and GameStop’s USD 2.7bn, Super Micro Computer’s USD 2.3bn, KKR’s USD 2.59bn, and Cloudflare’s USD 2bn deals all adopted zero-coupon terms, a feature that investors were more willing to accept due to strong underlying equity performance and deal momentum.

“There is always demand for zero-coupon deals when markets are strong and the equity story resonates,” one investor said. “Investors are willing to take the trade-off when there’s enough upside.”

Issuers benefit not only from the absence of interest payments but also from the ability to signal strength and discipline. “It has a cosmetic benefit,” said one ECM banker. “In a world of 5 percent base rates, showing that you paid zero is a statement. It’s something boards and CFOs like.”

Not for everyone

But the structure is not for everyone. Deals with zero coupons often come with trade-offs elsewhere in the terms, including lower conversion premiums or tighter caps.

“There’s always a balance,” said an equity-linked banker. “If you’re not paying a coupon, you’re probably giving up something else, either in the premium or the credit.”

He noted that the trend has skewed more toward large-cap names or issuers with active equity followings. “Story-driven names or higher-volatility tech companies can get away with it,” he said. “More marginal credits usually can’t pull it off.”

Still, the structure is proving durable. As more 2020 and 2021 converts come due, many of which also carried zero coupons, some issuers are opting to refinance with similar terms, particularly when their stock has outperformed or they have improved their credit standing.

The structure is also gaining traction among repeat issuers. “Once a company has issued a zero, it becomes easier to do it again,” said one of the bankers.

Looking ahead to the post-Labor Day period, bankers and investors expect more zero-coupon deals to come through, especially from high-quality issuers that want to maintain balance sheet flexibility while taking advantage of strong equity markets. But there is caution too.

“If we see volatility tick up or equity sentiment weaken, the appetite for zeros will dry up fast,” said the investor. “They work best in confident markets. They are less forgiving in choppy conditions.”