Even as investors retain an appetite for high-yield bonds and dividend plays remain popular in the equity market, has the equity-linked market not taken off so far this year. Most new issues have disappointed and investors are wary of getting bitten again.
Source: Reuters/Kim Kyung Hoon
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Asia’s equity-linked capital markets made a good start to the year as stock markets rallied, but that positivity soon fell away. “The first quarter was strong,” said Nick Smith, head of convertible bond origination, Asia Pacific, at Barclays. “The run rate for volumes in Q1 was ahead of 2011. That was without any jumbo deals of over US$500m, or domestic China issuance, which had been adding a lot to volumes. However following thin volumes in April and May, we are now on pace for the slowest annual rate in more than 10 years.”
Renewed worries about the eurozone and slowing Chinese economic growth have made CB investors more wary and price sensitive.
“Investors are concerned about the broader macroeconomic backdrop. The price at which they are willing to invest reflects that,” said Smith. “With the lack of conviction around the direction of markets, we’re not seeing peripheral players participate in primary issues. We are relying on the core convertible guys to get deals done, which makes the larger ones tougher to execute.”
While appetite is still there for the right deals, issuers in some specific industries may struggle to print new CBs.
“Unlike in the middle of the financial crisis, investor interest is still significant, although there is some hesitation in certain areas, such as real estate in China, and some Indian issuers,” said Ken Olson, managing director and global head of equity-linked solutions at Standard Chartered.
Barclays’ Smith named Australia, South Korea and Japan as the markets likely to find support from CB investors, saying consumer retail and technology companies were likely to be the most attractive industry sectors for issuance.
The market is still open to blue-chip issuers, but they have many financing avenues and have been able to take advantage of extremely low yields this year in the fixed-rate bond market. The brief leap in equity markets at the beginning of the year was also a mixed blessing.
“It’s challenging to convince a CFO to do an equity-linked deal so soon after his company’s share price had been at much higher levels,” said Smith.
One jurisdiction notably absent from the CB market so far this year is Singapore. This is one market where long-term debt funding can be obtained at very tight levels, and the five-year swap rate has halved in the past two years. Additionally, the stock market is at more or less the same level it was two years ago. This combination of factors gives issuers less incentive to issue a potentially dilutive CB to obtain five- or seven-year money. “In Singapore, if spreads actually widened, you might see some more CB issuance,” said StanChart’s Olson.
The increased credit support may help spur issuance in some markets, including India. Amtek India’s recent CB, the first public issue from an Indian corporate for many months, received a boost from sole bookrunner Standard Chartered’s provision of an asset swap, marking the return of credit protection to that market after a long absence. “Over the rest of the year, I think you’re going to see more of that happening in India,” said Olson.
The provision of asset swaps for CBs is one reason why Taiwan has been the most active market in Asia this year, with three deals printed before the end of May, all technology related.
Meanwhile, even if new equity-linked issuance remains difficult, there is another avenue for CB houses to earn fees. Tender offers and exchanges have been popular and increasingly creative this year, either as regular liability management exercises or because issuers were short on liquidity. Australia’s Paladin Energy bought back US$191m of its outstanding 2013s and printed a new issue via Barclays, Royal Bank of Canada and UBS to spread out its debt maturities. China Nickel Resources held a tender for its outstanding HK$1.33bn (US$171m) CBs due December 2012, with consenting bondholders to receive cash, a high-yield bond and a new CB with better terms, through a JP Morgan-managed process.
In India alone, about US$5bn in out-of-the-money CBs will fall due in the rest of the year, and many of the issuers lack the funds to redeem them. This has spurred issuers and bankers to new creative heights, with almost every company opting for a different solution so far this year. Some have simply taken out loans, or, in the case of JSW Steel issued a loan with warrants, via Credit Suisse, while others, with fewer options, are said to be planning to offer just a five-year extension.
