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Ping An Plans $4.1 Billion Bond Sale as Solvency Declines After Growth

Ping An Insurance (Group) Co. (601318), China’s second-biggest insurer, said it plans to sell as much as 26 billion yuan ($4.1 billion) of bonds after business expansion brought down its capital adequacy.

The six-year convertible bonds, with a coupon of no more than 3 percent, will be used to bolster working capital, the company said yesterday in a statement to the Shanghai Stock Exchange. The bonds will be sold in the so-called A-share market for yuan-denominated securities traded on China exchanges. The sale, passed by its board, will be voted on by shareholders on Feb. 8 and is subject to regulatory approvals.

Ping An “urgently needs a blood infusion” after announcing a 20 billion yuan capital (2318) injection into its Shenzhen Development Bank Co. unit and a 5 billion yuan equity boost to its life-insurance arm, Industrial Securities Co. said in a report today. Premium growth also lowered its solvency ratio to a level close to regulatory limits, the brokerage said. The ratio, which measures an insurer’s ability to settle claims, may rise to 194.9 percent from 170.7 percent at the end of October, if the bonds are all converted into stock, the company said.

Ping An fell 2.4 percent to 35.44 yuan in Shanghai as of 1:47 p.m. local time, extending this year’s decline to 37 percent. The company’s Hong Kong-traded shares dropped 3.3 percent today.

Limiting Impact

Ping An doesn’t have any separate share offering plans besides the bond sale, President Alex Ren said on a conference call today. The company doesn’t rule out subordinated bond sales by its units, according to Chief Financial Officer Jason Yao.

“The company has opted to launch its fundraising plan when its share price is low, limiting the impact,” Shao Ziqin and Tong Chengdun, Shenzhen-based analysts at Guosen Securities Co., said in a report today. The earlier-than-expected fundraising plan removes a key concern for Ping An shares, which “will help improve investor expectations,” they said.

The Shenzhen-based insurer said in August it will spend as much as 20 billion yuan to buy more shares in Shenzhen Development Bank (000001), adding to a 52 percent stake in the lender to balance its growth at banking, insurance and asset-management operations. Premiums income jumped 33 percent in the first nine months of this year.

Solvency Pressures

Chinese insurers may be subject to dividend payout restrictions when solvency ratios drop below 150 percent, and may be ordered to submit plans to prevent the gauge from falling below 100 percent, when the regulator can freeze approvals for new branches, curb management pay and restrict investment.

Ping An can only maintain its solvency ratio at around 150 percent in the next two years without the fundraising plan, according to Guosen Securities. The company’s third-quarter net income fell 44 percent from a year earlier to 1.76 billion yuan as stock-market declines cut investment income, according to an Oct. 26 filing.

The bond sale is likely to complete in the third quarter of next year or later, and conversions into equity won’t happen until at least six months afterwards, according to Ren.

It’s “completely possible” that the China Insurance Regulatory Commission may revise rules to allow proceeds from convertible bond sales to be used in the calculation of solvency ratios, instead of after conversions into stock under current regulations, he said. That would give an early boost to Ping An’s solvency from the debt issuance, he added.

“Convertibles are one of the most effective tools for raising capital in a volatile market,” Ping An said in an e- mail statement yesterday. In China, “investors are relatively enthusiastic about the instrument,” it said.

Ping An doesn’t have plans for overseas acquisitions at this stage as the company focuses on the domestic market, Ren said.

To contact Bloomberg News staff for this story: Helen Yuan in Shanghai at hyuan@bloomberg.net

To contact the editor responsible for this story: Joshua Fellman at jfellman@bloomberg.net

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