A recent boom in convertible bond sales is kindling hopes that Hong Kong’s capital market is warming up after a years-long chill, with Wall Street banks readying themselves to bask in the glow.
A combined US$10.5 billion in convertible bond offerings by Chinese tech leaders including JD.com, Alibaba Group Holding, Trip.com and Lenovo Group has swept the market in the past two weeks. As a result, total convertible bond issuance in Asia, excluding Japan, is on track to match 2023’s total of US$13.5 billion, according to data compiled by LSEG.
Hedge funds piled into Alibaba’s US$5 billion issuance – Asia’s largest-ever convertible bond transaction and the world’s biggest since 2008 – making the public deal more than five times oversubscribed. Alibaba owns the Post.
More deals are in the works, they said.
“Some of the recent deals have had levels of oversubscription that we saw at the peak of the market in 2021,” said Saurabh Dinakar, co-head of Asia-Pacific global capital markets at Morgan Stanley. “The convertible bond issuance surge is certainly a big boost for investor confidence and issuer sentiment.”
A convertible bond is a debt-like instrument that pays interest and includes an upside call option to convert into the underlying stock. It can help issuers reduce financing costs compared with traditional bond sales when interest rates are elevated, while also providing investors with equity upside potential and downside protection.
Doing a “jumbo-sized” convertible bond sale and using a portion of the proceeds to fund a concurrent stock buy-back is front of mind for a lot of Chinese issuers after witnessing recent successful cases, according to Rob Chan, Asia-Pacific head of equity-linked origination at Citigroup.
“Despite having cash available, if they are able to sustain more leverage on balance sheets, issuing a convertible at current low costs provides better capital efficiency,” Chan said. People are coming to terms with the idea that rates will stay higher for longer, and this is sparking more conversations with companies thinking about using convertibles, he added.
Food delivery platform Meituan, which announced a US$2 billion stock repurchase plan on Wednesday, is reportedly working with Bank of America and Goldman Sachs on a convertible sale, according to Mergermarket. Some tech companies in Taiwan and Australia are also getting more active in the space, and even companies in more traditional sectors in Southeast Asia are considering similar moves, according to Chan.
From the investor point of view, economic recovery expectations for mainland China are driving interest in convertible bonds. “Convertible bonds are extremely attractive to buy into if one believes that China and the macro environment provide potential upside,” said Chan.
The surge in convertible bonds is also a shot of confidence for overall market sentiment. Investors have accumulated “a fair bit of dry powder” over the past two years and are now looking to deploy this for the right opportunities, said Morgan Stanley’s Dinakar, adding that a continued level of health in the markets for follow-on and convertible bonds should bode well for IPOs.
“Our hope is that this would be a precursor or a preview for eventually the IPO market to come back,” he said.
“In general, we are optimistic about the prospects for 2024,” Dinakar said. “There’s a good pipeline in Australia [and] India, and it’s great to see China come back.”