These Asean Convertible Bonds Become Top Picks as Volumes Slump

  • Lombard Odier picks AREIT, Bangkok Dusit and Khazanah notes
  • Low conversion premium makes bonds good alternative to stocks

Sales of convertible bonds are drying up in Southeast Asia after a two-year slide, as stuttering economic growth and debt defaults keep new issuers out of the market.

That’s not a problem for Lombard Odier Investment Managers, whose $50 billion of assets include stakes in hybrid notes from regional companies that have gotten a boost from the outperformance of their underlying stocks in the past year. Its flagship $607 million Asian fund has had a total return of 55 percent since its inception in 2008.

The fund owns Ascendas REIT’s 2017 securities for their rare triple A ratings from both Moody’s Investors Service and S&P Global Ratings, said London-based manager Arnaud Gernath. It also likes Thai health-care services group Bangkok Dusit Medical Services Pcl’s notes for its high-margin business, while Singapore dollar-based bonds issued by Malaysia’s Khazanah Nasional Bhd. are getting a currency boost, he added.

“They perform really well when you have a volatile market environment,” said Gernath. “In Asia today, convertible bonds are the cheapest in four to five years, that’s why we like these three quality convertible bonds.”

New convertible bond issuance in Southeast Asia
New convertible bond issuance in Southeast Asia

Ascendas REIT’s S$300 million ($223.2 million) February 2017 notes have returned 5.2 percent this year while the underlying stock jumped almost 8 percent. It’s the only convertible bond in the region with top ratings from Moody’s and S&P. The notes may be converted into the underlying stock at S$2.0505, versus the current market price of S$2.42.

At a near-zero conversion premium, the price of the bond is about equal to the market value of the underlying stock. That means investors can buy the convertible notes as an alternative to the stock at little cost, while capping downside risks with the fixed-income features, said Terence Lin, assistant director of bonds and portfolio management at Singapore-based fund researcher iFast Corp.

High Margin

Bangkok Dusit’s convertible notes have gained 5.9 percent this year, a rally that sank its yield to as low as minus 1.63 percent on April 27. The health-care services provider expanded its income 7.1 percent in 2015 and has sustained its annual operating margin above 20 percent since 2005.

The securities are convertible into its stock at 21.045 baht, versus its current market price of 23.90 baht. The conversion premium is 1.8 percent. If not converted, investors can redeem the 10 billion baht ($286 million) notes at maturity and get repaid in the U.S. currency.

Currency Boost

Khazanah’s S$600 million zero-coupon 2018 notes have returned 1.3 percent this year. They may be exchanged into the shares of IHH Healthcare Bhd., a Kuala Lumpur-based regional hospital operator in which Khazanah owns a 43 percent stake.

IHH shares last traded at about 6.42 ringgit (S$2.18) on Bursa Malaysia, versus the conversion price of S$1.927 for a conversion premium of 0.7 percent. While the Singapore currency has weakened in 2016, it has still gained 15.9 percent against the ringgit since the convertible notes were sold in October 2013.

Dwindling Supply

Only two companies issued the equivalent of $2 million of convertible bonds in the first three months this year, making it the lowest tally in Southeast Asia since the third quarter of 2010, Bloomberg data show.

“Weakness in stock market performance and resulting lower equity market valuations means business owners have been less incentivized to issue CBs to share equity upside with investors,” said Lin at iFast. “Besides, access to debt financing has improved with the rate-cut cycle in recent years.”

Still, AREIT shares have gained 4.4 percent over the past 12 months and Bangkok Dusit climbed 19 percent and IHH advanced 11 percent, while their respective countries’ benchmark stock index fell by 8 percent to 20 percent.

“High quality convertible bonds are now mostly in negative yield-to-maturity because of their popularity,” Lombard Odier’s Gernath said. “It doesn’t mean that it’s expensive or it’s bad, or that you will lose money on them. It indicates the CBs are trading like stocks and investors are more likely to convert them because of the good performance.”

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