New CB issues largely dependent on secondary market performance

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Each year a feverish anticipation of heightened market activity follows the summer lull, but this year markets are on tenterhooks faced with the possibility of a global economic recession and a deepening European credit crisis that has forced companies to put a brake on fundraising activities.

Convertible bond (CB) offerings in the Asia Pacific region are no different. The return of new issues will be closely linked to the performance of notes in the secondary markets, bankers, companies and investors told dealReporter.

Valuations in the secondary market have been pressured since mid-July and will remain so with poor sentiment given the increased uncertainty. There is money on the sidelines but no conviction to invest given the risk that prices could fall a lot further, three CB investors said

There is also serious concern that some outright investors in Europe and U.S., who hold a fair chunk of Asian paper, could start to sell due to possible fund redemptions, one investor said. “They are not selling now but if one was going to sell, CBs would go sharply lower,” one trader said.

All things being equal on the global economic and European debt fronts, mid-September will probably offer a better gauge of secondary market performance and whether or not the window opens for new issues when everyone returns from the summer holidays, the three investors said.

On the issuer side, those not desperate for funds will want to wait for an uptick in equity markets to launch any offerings. Yangzijiang Shipbuilding was one opportunist that reached out to banks for a possible CB offering in March during better markets, as reported by this news service. The Singapore-listed Jiangsu-based shipbuilder has since said twice that it has no immediate CB plans, however.

The pipeline of over USD 1bn in Taiwanese CB issues has also been put on hold. Winstron, Far Eastern International Bank and Teco Electric and Machinery all have the necessary approvals in place to launch an up to USD 550m, USD 200m, and USD 200m CB, respectively, but have chosen to wait for the appropriate time. Gigastorage Corp is also in the same boat for its up-to-USD 100m exchangeable bond (EB) into shares of majority-controlled Giga Solar Materials.

“Now sentiment toward bonds is generally sour, which means issuers are not likely to get solid premiums, so the company is in wait-and-see mode as it’s not in an urgent need of cash,” a source familiar with Teco said.

A Wistron source said the company would also wait for markets to improve and is not in a rush to raise funds, even though its CB offering was meant to replace a failed global depositary receipts sale earlier this year.

The company may be looking for a window in September/October to launch the CB offering, two bankers familiar with the deal said. An army of 11 banks – Citigroup, Credit Suisse, Barclays Capital, Yuanta HK, Merrill Lynch Far East, HSBC, UBS, Australia and New Zealand Banking Group, Nomura, Standard Chartered and Mizuho – are on the deal, according to a regulatory filing.

“It will probably still be very quiet in the next 1-2 months with small windows of opportunity for issuers to launch [a new CB],” a third CB banker said. He believed companies in defensive sectors, defensive plays, and companies with a domestic focus are likely to get more interest than export-centric businesses.

Even then, issuers need to find “a real angle” to sell their CB offerings, according to a fourth banker. “I struggle to see how more similar paper can come out,” he said, citing examples such as the ample supply of paper from the real estate sector.

“Another zero-zero structure from Taiwan will not get done,” he added.

What is for certain is that the market has shifted from one where terms were issuer-driven to one where terms would be investor driven even if markets were to stabilize and corporates start to deliver better results in the fourth quarter, a fourth investor said.

“Investors would command better returns for sure, it’d no longer be like the first few months of the year when investors had a bigger risk appetite,” he said.

Then issuers that are perceived to have a riskier profile and to have weaker credit would find it altogether difficult to issue a CB. Small to mid-cap Indian issuers that have previously expressed interest in a new CB including Gujarat NRE Coke and Gitanjali Gems, as well as the Islamic Republic of Pakistan proposed EB into shares of Oil and Gas Development Co would continue to struggle, for instance.

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