Chinese firms drive US$13 billion Asia-Pacific boom in convertible bonds

Issuance of equity-linked debt, including convertible bonds, could hit a record high in Asia-Pacific this year, driven by Chinese firms seeking lower-cost funding and investors betting on market gains amid global volatility, according to bankers. So far this year, investors have shown a strong appetite for US$10 billion in convertible and exchangeable bond offerings by issuers from mainland China and Hong Kong, including Baidu, Ping An Insurance (Group) and Chow Tai Fook Jewellery Group – even when the deals carried aggressive terms. They accounted for a big chunk of the US$13 billion total issuance volume in Asia-Pacific excluding Japan and mainland China onshore shares, according to data compiled by Dealogic. The total is on track to exceed last year’s record of US$25.7 billion. “Convertible bonds are an instrument that resonates with many institutional investors in the current market,” said Brian Chau, co-head of equity-linked deals for Asia at UBS. “They offer downside protection while providing equity upside, which is particularly appealing given the macro volatility.” The market tailwinds started in the second half of last year when big Chinese tech firms rushed to take advantage of convertible bonds. This year, the securities have been attracting more types of issuers and investors. In the past 12 months, Asia-Pacific excluding Japan recorded issuance of around US$32.9 billion in convertible and exchangeable bonds – debtlike instruments that pay interest and include an upside call option to convert into either the underlying stock of the issuer itself or exchange them for another stock in which the issuer holds a stake. “Investors are paying up that higher volatility in the way that they are pricing the embedded conversion option,” said Rob Chan, head of equity capital markets syndication in Asia at Citigroup. “[That] is why, despite the relatively high interest rate backdrop, so many issuers are now able to secure zero-coupon financing.” Some recent deals featured low coupon payments and lofty conversion premiums – the amount the company’s stock must rise from a predetermined reference price to trigger the embedded option. Last week, Chow Tai Fook raised an upsized US$1.1 billion from convertible bonds that carry a 0.375 per cent coupon and an initial conversion price of HK$17.32 each, a premium of 42 per cent above the jeweller’s average stock price for the 10 trading days up to the pricing day. Investors looking at Asian convertible bonds have expanded, as they capitalised on China’s relatively stronger growth and lower equity multiples than the US, according to Chau. “Asian and European investors are buying into some sizeable IPOs [initial public offerings] and convertible bonds and wanting more, showing a structural demand,” he said. Some Chinese credit funds had also become more active in the market, Chan said. “They like the credit element of the convertible bond, and are there to buy it when the stock trades lower,” he said. “Overall, the pool of capital has been growing, and the ecosystem surrounding convertible-bond issuance and secondary trading has significantly improved.” A variety of Chinese companies, including US-listed ones, have accelerated their fundraising plans, taking advantage of the 90-day tariff negotiation period and riding on strong equity performance and sentiment. Chinese budget variety-goods chain Miniso completed a US$550 million convertible bond in January, opting to use its Hong Kong shares rather than its American depository receipts (ADRs). This year, US-listed Chinese video-streaming platform Bilibili and data centre operator GDS Holdings also raised convertible bonds of US$690 million and US$550 million, respectively. “[Companies with] US-listed ADRs are returning to Hong Kong to tap convertible bonds to increase the liquidity pool and investor base amid the US-China geopolitical tensions,” Chau said. The rebound of Hong Kong’s IPO market after several lacklustre years has worked well with the convertible bond market, which is a key tool to raise funds post-listing. “The Hong Kong market has become more healthy and mature than before,” Chau said. “Many issuers now have the ability to choose between different instruments in the capital market to fund growth and development.” To be sure, tariff and geopolitical uncertainties remain. “However, the China theme has shown resilience since Covid-19,” Chau said, adding that Beijing’s domestic consumption support had strengthened the mainland and Hong Kong markets, reducing their correlation with US market performance. “Right now, the level of demand and appetite has not been stronger, so there’s no reason to expect a turnaround,” said Chan.

Chinese firms drive US$13 billion Asia-Pacific boom in convertible bonds

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Appetite for equity-linked debt is strong amid global volatility, even with aggressive terms, analysts say

Appetite for equity-linked debt is strong amid global volatility, even with aggressive terms, analysts say