Ping An Insurance (Group) has mandated China International Capital Corp (CICC), Credit Suisse Founder Securities, in which Credit Suisse owns a 33% stake, and Goldman Sachs Gaohua to help it sell a domestic convertible bond of up to Rmb26 billion ($4.1 billion), according to sources.
The deal, which was first announced just before the Christmas holidays, will help Ping An to boost its solvency margin ratio, which has come under pressure as its various business segments are experiencing rapid growth. It will also provide funding for the further expansion of its businesses, including the recently acquired Shenzhen Development Bank, and its investment activities.
In a circular issued to shareholders yesterday, the company also noted that it needs to increase its risk buffers as the domestic Chinese economy is facing a potential slow-down in growth and an increased risk of policy shifts as economic uncertainties persist.
The fact that Ping An is choosing to seek capital through a domestic CB rather than from a straight sale of A-shares could be a sign that issuers are not sure the struggling market would be able to support a sale of this size. Contrary to what has been the case in the past, many of the larger IPOs last year were forced to price below the top end of the range and many also traded poorly in the secondary market.
However, another reason why issuers don’t sell equity straight away has to do with the strict price restrictions that dictate that a share placement cannot be priced below the latest close or the 20-day volume-weighted average price, whichever is higher. This means companies cannot offer new shares at a discount to the market price, which makes it a difficult sell. CBs are subject to the same rules, but because the bonds will be converted in the future, investors will typically be able to buy the shares at a discount to the market price at the time.
Ping An’s A-share price is also currently trading close to its 12-month low, making a straight equity sale quite unattractive. To maintain a degree of flexibility the company is also seeking approval from shareholders to issue new Hong Kong-listed H-shares corresponding to 20% of its H-share capital. It hasn’t announced any actual plans for such a sale, however.
Two other companies that are aiming to raise follow-on capital from A-share CBs are China Petroleum and Chemical Corp (Sinopec) and Minsheng Bank, which are waiting for regulatory approval to sell up to Rmb30 billion and Rmb20 billion respectively. Sinopec also raised Rmb23 billion from the sale of six-year A-share CBs in February last year.
The drawback for Ping An is that the CBs don’t actually count towards its capital base until after they have been converted into equity. However, domestic Chinese CBs tend to be very equity-like with low conversion premiums and early calls. They also tend to come with step-up coupons as the issuer is happy to offer higher coupons towards the end of the life of the bond (as it isn’t expected to survive that long) in exchange for low coupons initially. Last year’s Sinopec CB also included a reset of the conversion price at the option of the issuer (but subject to approval by shareholders), which makes it even more likely that it will convert early.
Perhaps as an incentive to the bondholders ahead of the issue of a second CB, Sinopec sought approval from shareholders to lower the conversion price on last year’s CB in December last year. Shareholders approved the proposal and the conversion price has since been lowered to Rmb7.28 per share from Rmb9.73 initially.
According to the information provided so far, the Ping An CB will have a six-year maturity and the annual coupon will be no more than 3%. As per Chinese regulations, the conversion price will not be below the average trading price in the 20 days before the offer document is published and the average trading price on the day immediately before that same date. The bonds can be converted into Shanghai-listed A-shares after six months.
If fully converted, the CB will increase Ping An’s solvency margin ratio to 194.9% from 170.7% as of the end of October last year.
The CB was approved by the Ping An board in December and the company’s A- and H-share holders will get to vote on the issue at an extraordinary general meeting on February 8. Assuming it gets the go-ahead, the company will then apply for regulatory approval to issue the bonds. This process typically takes five to six months, which suggests the deal may hit the market in June or July.
Sinopec and Minsheng Bank are slightly ahead of Ping An in time as they have already obtained approval from shareholders and are currently awaiting the nod from the regulators.