Asia turns bullish on convertible bonds
September 2, 2013 Leave a comment
September 1, 2013 1:23 pm
Asia turns bullish on convertible bonds
By Paul J Davies in Hong Kong
Stock market jitters and rising costs of credit do not sound like good news for companies’ funding needs. But convertible bonds are an exception that prosper in such volatile times – and Asian groups are rushing to take advantage. Qihoo 360 Technology, a US-listed Chinese security software firm, saw very strong demand for one of the year’s biggest issues last week. That $600m deal took total issuance for the year so far in Asia excluding Japan above $10bn, according to Dealogic.If a $400m deal from Taiwanese semiconductor groupASE prices this week as expected, the market will match the total issuance in 2012. With four months of the year still to go, that will also put Asia on course for one of its top-three years.
Convertible bonds allow companies to cut the cost of borrowing money in the bond markets because they include an option for bondholders to buy shares at a certain price when the bond matures. When stock market volatility is high, the value of that option is increased, which means companies can pay less in cash interest than they would with a straight bond.
It is not only Asia that is seeing strong issuance. The US market has already surpassed last year’s total with $23.4bn worth of deals, while issuance in Europe and Japan has already hit three-quarters of last year’s totals, at $15.7bn and $2.8bn respectively, according to Dealogic.
Rupert Mitchell, head of equity capital markets for Citigroup in Asia excluding Japan, said that as the supply of bank loans has tightened across Asia and bond markets have become more difficult, convertibles have begun to look much more attractive to Asian issuers.
“In the west, convertibles are a much used financing tool, in Asia its been a bit more on and off because bank credit has historically been plentiful,” Mr Mitchell said. “The higher stock market volatility now is making the option component of these bonds much more valuable, thereby keeping the yield and the coupons lower.”
He added that he would not be surprised to see this year’s volume so far double before the end of the year.
Other bankers are equally bullish with the head of ECM at a rival investment bank saying his team had a string of deals about to hit the market, including several within China.
Alongside technology companies, real estate and financial groups have also been big issuers of such bonds in Asia. By far the biggest deal in Asia this year was the $3.2bn issue from China Minsheng Bank in March. The biggest ever Asia deals were from Bank of China and ICBC back in 2010.
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