Chinese firms, spurred by a rebounding domestic share market, are poised to launch a boom in convertible bond issuance that defies refinancing woes hounding issuers elsewhere in Asia. Investors also look likely to lap up the new issues as yields languish elsewhere in the Asia ex-Japan bond market, providing a new source of funds for companies while both the government and investors remain cool on the prospects for new equity issues.
Signs of high expectations abound. About 10 Chinese companies plan to issue bonds convertible into yuan-denominated A shares, worth nearly 10 billion yuan ($1.5 billion), nearly triple the 3.6 billion yuan of issuance pending at this time a year ago.
Prices of all the 20 or so convertible bonds traded on the Shanghai and Shenzhen stock exchanges, with a combined capitalisation of 32.5 billion ($4.8 billion), have jumped this year, after plunging last year. And turnover in the fledgling market reached 5.37 billion yuan in February, the highest since December 2003, and remained relatively high at 3.33 billion yuan in March.
The upbeat outlook contrasts with the woes of many issuers elsewhere in Asia, including Indian and Taiwanese companies that face refinancing difficulties as fewer bonds are converted to equity and borrowers must be repaid in cash at redemption.
Recently, cash-strapped Taiwanese chipmaker ProMOS got a nod from its convertible bondholders to accept a redemption at a deep discount, while Indian wind turbine maker Suzlon Ltd is seeking to restructure bonds worth $500 million.
"Chinese convertible bond issuers' financial status has not been directly affected by the global crisis and they have little problem repaying their debt if they need to," said Dai Xu, senior corporate bond analyst in Galaxy Securities in Beijing. Even a stock market plunge has not stoked a flurry of defaults or a restructuring wave among convertible bond issuers.
China's benchmark Shanghai Composite Index plunged 65 percent in 2008, the worst performer among the world's big stock markets, as a retreat from record highs the year before accelerated with the financial crisis and an economic slowdown. But in the first quarter of this year, the Shanghai index was the best performer among major markets, rising 30 percent on signs that at least parts of the economy have started to recover.
This has raised hopes the China Securities Regulatory Commission may soon resume approving the issuance of convertibles after they quietly suspended the process last year over concerns more supplies would depress the plunging stock market further.
Potential issuers are also keen to monetise the surge in the market capitalisation of their company's shares. Chi Caigong, board secretary for Jinan Iron and Steel Co, whose shareholders last week approved a plan to issue up to 2.9 billion yuan in convertible bonds, said now was a good time to come to the market.
"Our firm needs some financing for capital projects. After a study of a wide range of products, we think convertible bonds best suit our needs at the present time," he told Reuters. Analysts said some companies were particularly interested in issuing convertibles now that stocks are rallying, and since there would be no immediate threat of earnings dilution.
Moreover, rights issues and new share offers became highly unpopular among investors last year after many plunged well below their offer prices once they hit the market. "The market has now got to the point that a company would ruin its reputation with investors once it announced a rights offer," said Zhu Lan, bond analyst at Shenyin & Wanguo Securities in Shanghai. "Through convertible bonds, companies can still expand their equity base without damaging their image."
Jinan Steel and other prospective convertible bond issuers such as Bohui Paper Industrial and chemical producer Zhejiang Longsheng would also benefit from low yields on Chinese bonds after a series of official interest rate cuts to fight the economic slowdown, traders said.
Yields have rebounded somewhat in recent weeks, as tentative signs of economic recovery ahead could mean an end to central bank rate cuts, but most still linger near multiyear lows. Jinan's five-year convertibles will bear a 0.5-2.8 percent coupon, payable annually, and will be convertible into shares six months after issue, while Bohui plans a 0.5-3.0 percent coupon.
"Those yields would have appeared low just one year ago but now they look quite attractive," said a bond trader at China Merchants Bank in Shenzhen. Convertible bondholders are also protected by a forced redemption clause - if the share price remains below a specific level within a certain period before maturity, the holder has the right to get these bonds redeemed ahead of schedule.
The attraction of convertibles is evident in the market. Prices for the 2.8 billion yuan in five-year convertible bonds issued by Nanshan Aluminium have jumped 40 percent this year after losing 15 percent since their listing in May 2008 until the end of the year.
Comments
Comments are closed.