China Builders Lead Convertible Bond Sales in Record Market

Updated on
  • Chinese firms sell a record $5.3 billion of notes in Hong Kong
  • Morgan Stanley is flagging a meaningful decline in Hang Seng

Chinese developers are driving convertible bond sales in Hong Kong as analysts warn of a stock price correction.

Seven Chinese companies have sold HK$41.8 billion ($5.3 billion) of the hybrid securities this year, surpassing previous full-year totals, according to data compiled by Bloomberg. Led by China Evergrande Group’s record sale this week, five developers have priced convertibles, which typically offer issuers cheaper funding than straight bonds.

A 17 percent jump in property company shares in January, after an almost doubling in 2017, has made equity-linked financing more appealing for Chinese developers facing higher onshore funding costs and record maturities this year. The window for convertible sales may be limited with Morgan Stanley predicting a “meaningful” dip in the Hang Seng Index within weeks.

Record Sales

Chinese issuers have sold more Hong Kong convertibles in a month than for past full years

Source: Bloomberg

“Rising interest rates onshore and offshore, together with buoyant equity prices, set up the ideal environment for new CB issuance,” said Abhishek Rawat, a director at Hong Kong-based China Merchants Securities Investment Management (HK) Co.

READ: What Convertible Bond Watchers Say on Record Hong Kong Market

The surge in offerings from Chinese developers isn’t likely to ease the supply pressure from the sector given the relatively small offering size, according to a Bank of America Merrill Lynch report dated Jan. 30.

In the near future, market participants expect more deals to hit the market. Large Chinese state-owned companies may tap the CB market, as well as pharmaceutical and consumer firms, according Nathan McMurtray, Hong Kong-based head of equity-linked products at CLSA Ltd.

The frenzy in issuance could indicate the market is at its peak.

“CB is a bull-market product,” said Ben Sy, head of fixed income, currencies and commodities at JPMorgan Chase & Co.’s private-banking unit in Asia. “When there is significant increase in CB issuance, the market should have rallied a lot, and the stock price tends to near the peak.”

IssuerAmount (HK$)CouponMaturityConversion Premium/Discount
Country Garden15.6bZeroJan. 201920%
CIFI Holdings2.79bZeroFeb. 201930%
Powerlong Real Estate1.99bZeroFeb. 201923.5%
Future Land2.35b2.25%Feb. 201928%
China Evergrande18b4.25%Feb. 202340%
Lingbao Gold76m5.6%Jan. 2023-19.5%
China Huiyuan Juice1bZeroJan. 20192.2%

— With assistance by Narae Kim, Kana Nishizawa, Emma Dong, and Carrie Hong

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