Low rates, volatility prompt rush for Asia's convertible bonds

By Scott Murdoch
HONG KONG, Feb 23 (Reuters) - Asia has recorded the
strongest start to the year for convertible bond deals in three
years, and more is on the cards as low interest rates and
financial market volatility point to a robust pipeline of future
issuance, according to data and advisers.
Convertible bonds are an alternative to equity and bond
issuance and allow companies with low or no credit ratings
easier access to cash. The rush underscores investors betting on
the liquidity-driven stock market rally to continue.
In Asia, there has been $8.42 billion worth of the bonds
issued since January 1, the highest level since 2018 when $10.7
billion worth of deals were carried out in that time frame,
Refinitiv data shows.
Investment bankers said high growth companies with negative
cashflow, predominantly tech and electric vehicle firms, were
expected to keep tapping convertible bonds to secure cash,
capitalising on the bullish investor sentiment.
Companies likely to benefit from the world's re-opening from
the pandemic would also be active participants in the markets,
they said.
Low global lending rates have led to a rising number of the
convertibles in Asia with a zero coupon, meaning investors are
not paid interest while they hold the debt.
"We will have more zero coupons going forward in Asia, that
trend will continue," said Gaurav Maria, JPMorgan JPM.N head
of equity-linked and private capital markets for Asia Pacific.
"It's hard to say what percentage there will be - it's a
function of what kind of issuers are coming to the market. Large
and high quality issuers will not expect to pay coupons if that
is not required."
Bank of Shanghai 601229.SS raised $3.1 billion in January
using convertibles, while electronic vehicle maker NIO Inc
NIO.N secured the largest offshore transaction of $1.3 billion
in the first fortnight of the year.
With zero coupons, investors buy the bonds for the prospect
of securing future equity gains when the instruments convert
into stock. They would also have their principal repaid at
maturity if the option to convert into shares is not exercised.
"Convertible debt is an attractive funding choice when share
prices are high, interest rates are low and volatility levels
are reasonably elevated," said Saurabh Dinakar, Morgan Stanley
MS.N head of Asia Pacific equity linked solutions.
"We had an expectation that issuances volumes would remain
elevated but we have been surprised at how rapidly the pipeline
has developed and how it continues to develop."