July 26, 2012 7:17 am

Asian convertible market set for revival

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Workers working on the body of a large ship©Alamy

The $1.3bn convertible by China Shipbuilding Industry is the only deal so far this year exceeding $1bn

Equity-linked debt issuance in Asia is set for a recovery in the second half of the year, say bankers in Hong Kong, as investor demand and market conditions improve.

The market for convertible bonds globally has struggled this year with total issuance hitting some of the lowest levels ever seen for the first six months of the year, according to data from Dealogic.

Markets bonds

Markets bonds

The drought has sparked some fears about the viability of the market. If the volume of outstanding deals shrinks too far, the market may become too small to justify the effort required to invest in this complex asset class.

Asian issuance was down dramatically in the first half of the year at just $4.8bn near the end of July, less than one-third the level of the same period last year and the lowest since the first half of 2009, according to Dealogic.

However, issuance in Asia excluding Japan has held up better since the financial crisis than in the US or European markets as the number of investors interested in the market has grown, according to bankers. It has also been helped by the very limited market for junk bonds, which makes it more difficult for lower-rated borrowers to raise money that way.

Aloke Gupte, head of equity-linked origination for Asia-Pacific at JPMorgan, says that, in spite of the poor start to the year, the market is growing for convertible bonds, which pay a fixed income but convert into shares at an agreed price.

“There are more funds in Asia that are buyers of convertibles than there were last year,” he says. “I think the second half will be much better, especially if the equity market sees a run-up. [Convertible bonds] are likely to be a much easier way for non-investment grade companies to raise funds.”

Mr Gupte adds that market conditions are good for new issuance. Stock volatility is high, which means lower borrowing costs for issuers, and companies have room to take on more debt, he notes.

Apart from tough years in 2008 and 2009, Asian issuance has run at fairly consistent levels of $20bn-$30bn a year since 2006. That is a sharp contrast with the US where issuance in the two years before the crisis of $71bn and $95bn has tumbled, falling to $24bn last year.

Europe has also seen a significant decline in issuance since before the crisis, and was the smallest region over the past two years with 2011 issuance falling below $10bn.

Bankers say part of the reason Asian issuance has dropped off this year is that the conventional debt market has been so strong, seeing record issuance in the first half of this year in an environment of low interest rates.

However, Nathan McMurtray, head of equity-linked origination for Asia at Deutsche Bank, says the plain debt market has been a much better fundraising avenue for investment-grade borrowers than for junk-rated issuers, which should prompt more convertible issuance.

“The ratings process for many non-investment grade companies is long and costly, but convertible bonds don’t need that rating so they can be a much quicker and cheaper form of financing for these companies,” he says.

The Asian market consistently sees a higher number of smaller deals, underscoring the view that it is driven by smaller companies that are often lower rated or even unrated.

Shanghai-based China Shipbuilding Industry’s $1.3bn convertible is the only deal so far this year exceeding $1bn. The second-largest deal from Khazanah, the Malaysian sovereign wealth fund, was just $358m, while five of the top 10 were $250m or less.

This year had been expected to be one of “doom and gloom” for the Asian convertible market, Mr Gupte adds, because of a $16bn overhang of maturing costly deals from Indian companies.

Suzlon Energy is among the companies that analysts said had significant amounts of debt coming due to be repaid.

Some Indian deals were facing costly restructuring or potentially even defaults. “But these repayments and restructurings have gone better than people expected, so that should give investors more confidence,” Mr Gupte says.

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