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Chinese companies are issuing convertible bonds at a record rate this year, as they hunt for cheap forms of financing and a way to boost their offshore cash balances.
Ecommerce company Alibaba, which in May raised one of the largest convertible bonds on record at $5bn, and insurer Ping An, which raised $3.5bn in July, are among companies driving the rush to issue a form of debt that surged in popularity in western markets during the coronavirus pandemic.
Companies in China and Taiwan have issued $18.8bn of convertible and exchangeable bonds in 2024, surpassing the previous record of $18.7bn set in 2021, according to Citigroup data.
“The volume of issuance has increased dramatically,” said Rob Chan, head of Apac equity-linked origination at Citi. “You’re going to see quite a bit more activity going into next year.”
Convertible bonds allow the owner to turn them into a preset amount of equity, meaning that in effect they act as a call option on — or the right to buy — the shares.
The bonds are proving so popular among Chinese corporates because they offer a cheaper form of financing than conventional debt. Companies are able to raise money as much as 4 percentage points cheaper using convertibles compared with conventional dollar bonds, according to Chan.
With markets now expecting US rates to remain higher for longer under president-elect Donald Trump, this has become a particularly attractive option for chief financial officers.
Many firms are looking to raise money in order to carry out buybacks of their shares and raise the share price. Despite a recent stimulus-driven rally, China’s CSI 300 index is still down by about one-third since early 2021, with many foreign investors having deserted the market in recent years.
“A lot of especially tech names have this need to do share buybacks to support share prices, they need some funding for this,” said Christopher Li, Asia credit trading desk analyst at BNP Paribas. He added that a lot of tech companies are not choosing conventional bonds because they “do not want to see their names attached to a 5 per cent coupon”.
Beijing has been eager to revive domestic equity markets and has unveiled a tool to lend money to Chinese companies to encourage share buybacks. Corporates, meanwhile, are increasingly embracing buybacks as a way of helping their share price performance and becoming more investor-friendly. Stock buybacks on mainland exchanges are still on track for a record high in 2024.
Another key driver of issuance by mainland Chinese companies is to hold cash offshore, at a time when mainland regulators are making it tougher to move money outside the country.
Although the National Development and Reform Commission, a mainland regulator, needs to approve any offshore convertible bond issuance with a duration of longer than a year, this is still seen as a faster process than getting permission to expatriate money from inside China. International companies like Alibaba and Tencent need money held offshore in order to buy back securities listed in New York or invest abroad.
Analysts said that the recent stimulus measures from Beijing that sparked a rally in the local market had made issuing new convertibles even more attractive for corporates, by allowing them to offer less lucrative terms to investors in the convertibles, for instance a harder-to-reach conversion price or a lower coupon.
“Companies are able to set a conversion price at a higher price point and so it reduces the amount of dilution that they may face,” said Citi’s Chan.
Such is the level of demand that many investors are even prepared to forgo coupons on the debt in order to get the option to convert to equity.
WuXi AppTec, Quanta Computer and Hon Hai (Foxconn) raised a collective $2.2bn for zero coupon convertible bonds this year, in a sign of the appetite for such debt.
Dealogic data showing that convertible issuance is on track to hit a record this year in China and Taiwan does not include private placements of convertibles, including Lenovo’s announcement of a sale of $2bn of the debt to a unit of Saudi Arabia’s Public Investment Fund earlier this year, which has not yet happened.
Convertible bond issuance has been a bright spot for Western investment banks in China, Hong Kong and Taiwan. Bankers are grappling with a downturn in initial public offerings and a glum equity market, even after Chinese authorities unveiled policies to stimulate the economy and boost asset prices.
Citi’s Chan said that the pipeline of further mainland Chinese convertibles awaiting mainland regulator approvals to issue was significant.
“Whether or not they ultimately come to market, we’ll have to see,” he added. “But there are [more] companies getting prepared for that process.”
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