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The convertible bond market across Asia has been hard hit as credit spreads have shot up from 200-250 basis points (bps) to 800-900 bps, said Vineet Suchanti, managing director, Keynote Corporate Services. If CB investors have to pay such spreads to hedge the equity risk on their positions they are out of money from day one, he explained.
This extra cost could lead to delays in new issuance among the companies most affected.
This year has already seen many corporates defer potential CB issuances or look at other means of raising capital. India-listed Binani Cement, which had planned a USD 125m foreign currency convertible bond, is the latest to join the trend deciding to go for a USD 85m debt issue, a source associated with the deal said. Elder Pharma, an India-listed pharma company, also deferred its USD 30m FCCB issue for at least a month, said international director, Alok Saxena. ”We might look at other means of raising funds if the market situation for CBs does not improve,” he added.
The scene is no better in South Korea. Korean companies are concerned whether they will be able to pay the yield to maturity rate on their CBs at a later date due to unstable market conditions, a Seoul-based CB banker said.
Though most Korean companies issue domestic convertible bonds, they also rely on overseas hedge funds because there are not many specialised convertible bond investors in Korea, said the Seoul-based banker.
A few small KOSDAQ companies including Mobiltop have attempted and failed to raise funds through issuing CBs this year, the banker said.
Elsewhere in Asia, listed Taiwan IT company, Innolux also delayed its USD 459m convertible bond issuance following a fall in its share price.
A HK-based hedge fund investor agreed the pricing has affected investment in CBs across Asia. It affects markets such as India more as it adds to the hedging costs already borne by foreign investors. In India, most convertible bonds are issued are to overseas investors through foreign currency convertible bonds [FCCBs], a CB banker explained. In countries like South Korea, Taiwan, or China, CB issuances are generally made to domestic investors whilst in China CBs are generally sold to existing shareholders.
Moreover, in India, where the coupon or yield on the convertible bond has been fixed at 250 bps over six-month Libor since July 2007, with current credit spreads, the maximum an investor can make is 5.5%-6% return and he has to shell out an 8%-9% in hedging cost. This means he is out of money from day one, Suchanti explained.
CB investors need to pay to take an equity risk, said Suchanti. The way equity markets have been hit, CB investors are no longer willing to look at CBs with a high conversion premium, said the banker. ”Premiums have gone down to zero; actually investors want a discount,” he added. CB investors are saying that if they end up having to pay 2%-3% on credit spreads, then they need to get stock at a discount. In India, however, the pricing of convertible bonds is regulated by the Securities & Exchange Board of India (Sebi) and, as a result, they cannot be offered at a discount, said Suchanti.
Companies like Tata Motors are opting for a mix of equity and debt. However, only strong companies can do so today, said the banker associated with CBs. Tata Motors has announced plans to raise equity-linked instruments to the tune of USD 1bn and is expected to choose the FCCB route, as previously reported here. ”Valuation will be affected as stock price has dipped,” said the banker. Would the conversion premium it commands be badly affected? ”Premium will be less but a company like Tata Motors can still command a premium of 15%-20%,” he added.
Suchanti felt that even companies like Tata Motors would not be foolish enough to tap the equity markets today. It is more likely that it would go for debt and and then, at a later stage, swap the instrument and retire its debt, he explained. Tata Motors was not available for comment.
Prudent corporates have decided against entering the market at this time. The Essar group for instance will not go ahead now with their planned foreign currency convertible bonds (FCCBs), said an insider. ”Capital raising will stop for some time as this is the prudent way of dealing with the current volatile situation,” said the insider.
No corporate wants to pick up money where the investor will lose, said Vineet Kumar, managing director at Temptation Foods. The company’s planned CB is expected to launch in the next 30-45 days, and it has decided to set the conversion price at a lower price band so that investors gain, Kumar explained.
The London-based CB investor said in the current market scenario, smaller deals and CBs from strong sectors or companies including Innolux will ”get done in the end.” CB deals of USD 20m-30m will be feasible as companies only need to find one or two investors to complete the deal, he explained.
Mastek, the listed Indian IT company, is facing a similar scenario. Its chief financial officer and director of finance, R Desikan, said that the company’s planned CB issue will be sold to strategic investors. He explained that it will not be meant for general investors or banks, agreeing that the current market was not conducive.
The CB investor went on to add that larger issuances - particularly for companies in Asia with a market cap of USD 100m looking to raise sums much larger than their own capitalisation - could face difficulties finding buyers for their CBs. Liquidity in Asia is really bad right now, the investor said. ”You can’t sell the bonds, no one is bidding for them,” the investor said.
He added that in Europe too, investors may start to tread more gingerly even in sectors such as oil refinery and exploration where last year there were five convertible bond deals. Swiss listed Petroplus’s CB issuance last week initially met positive reception and was issued at par but lost 4% in a week, the London based investor said, this could deter people from looking at future deals in the sector.
Companies from the real estate sector planning CBs may also struggle to find buyers, the investor said. A lot of names in real estate have been mentioned as potentially looking to issue a CB, but “no one’s going to buy,” he said, adding that for the right sector such as in the commodities sector investors could still be keen to invest.
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