Wasting no time since receiving regulatory approval at the end of last week, Ping An Insurance (Group) will open the order books for its long-awaited Rmb26 billion ($4.2 billion) domestic convertible bond on Friday.
The deal, which is set to become the largest CB issue in China’s domestic market this year, comes just days after the Chinese government announced a number of reforms that are viewed to be beneficial to the country’s life insurance sector, such as a relaxation of the one-child policy.
Although much still depends on the implementation, Chinese insurance companies have seen a sharp spike in their share prices on the back of this news (especially for their overseas-listed shares), which makes the Ping An CB look particularly well timed.
The company first announced the plan to issue a domestic CB almost two years ago so the fact that the approval coincides with a particularly favourable market environment is quite lucky. On the other hand, the issuer was ready to go as soon as it got the chance, allowing it to make the most of the recent gains.
Since the CB was approved by the China Securities Regulatory Commission (CSRC) on November 14, Ping An’s Shanghai-listed A-shares have risen 8.9%, while its Hong Kong-listed H-shares are up 16%.
The CB will be offered to the company’s existing A-share holders first, with each share entitling them to buy Rmb5.432 worth of CBs. Any CBs still left after that will be allocated to other investors. However, the one-day subscription period will be the same for both existing shareholders and new investors.
Similar to other A-share CBs, there is expected to be a high take-up rate among existing shareholders. One reason for that is the fact that A-share CBs come with low conversion premiums, which makes them very equity-like and means that investors can typically convert into equity at a sizeable discount to the prevailing market price. And on top of that they offer an annual coupon.
That usually doesn’t deter other investors from putting in orders though and since the terms were announced on Tuesday evening this week, the lead banks have been busy marketing the transaction to potential buyers.
Ping An has fixed the conversion price at Rmb41.33, which translates into a 1.3% premium to Tuesday’s close of Rmb40.78 and a slightly wider premium of 3.3% versus yesterday’s close of Rmb40.01.
However, compared to the closing price before the announcement of the regulatory approval a week ago, the conversion premium is 12.5%, making it a pretty attractive deal for the issuer.
The CB has a six-year maturity and like other A-share CBs it offers a gradually rising coupon, starting from 0.8% in the first year. The reason for this is that most A-share CBs tend to convert into equity in the first two or three years, so by keeping the coupon payments low in the early years the issuer is able to lower the actual cost of funding. At the same time, the more generous coupons closer to maturity make the deal more attractive to investors.
In the case of Ping An, the coupon will step up to 1.0% in year two and then to 1.2%, 1.8%, 2.2% and 2.6% in the following years. The CB will also redeem at 108% of face value, which translates into an additional yield of 2.4%.
The CB is convertible into A-shares at any time starting six months after the issue date. And to prompt conversion the issuer can call the bonds after the first six months, subject to a 130% hurdle.
There is no automatic conversion price reset, but if the A-shares are trading below 80% of the CB conversion price for an extended period of time, the issuer can propose to lower the conversion price. Such a reset will require approval from shareholders, however, as it will have a dilutive effect on the existing shares. As a result, investors tend to ascribe little value to it.
In a first for China, the Ping An CB will be treated as equity on the issuer’s balance sheet even before the bonds are converted into actual shares. This is a possibility open to insurance companies globally, although the ability to implement it depends on how the local regulators interpret the guidelines.
Ping An has received approval to treat its CB as equity from day one and based on its most recent accounts from June 30, this will improve its solvency ratio to 181% from 163% before the deal, said one source with access to the Chinese-language CB circular.
As a result, the CB is more than just a funding tool for Ping An, which has recently (at the end of October) also sold Rmb1.8 billion of offshore renminbi bonds to boost its coffers. According to media reports, the five-year dim sum bond was priced with a 4.75% coupon, which shows the savings in funding costs that the company is able to achieve by issuing a convertible bond.
By launching the CB so quickly after receiving the regulatory approval, Ping An is getting a jump on Sinopec, which plans to sell up to Rmb30 billion of domestic CBs. The oil refiner, which is officially known as China Petroleum & Chemical Corp, received approval for the bond from the China Securities Regulatory Commission (CSRC) in early July this year, but has yet to launch the deal.
The company is known to be very price sensitive and the general belief is that it has been waiting for its share price to improve before going ahead. Its Shanghai-listed shares fell 22.5% in late June to a low of Rmb4.10 on June 26 and has been trading around the Rmb4.50 mark for much of the past four months. The buying has picked up since late October, however, and it is currently trading around Rmb5.
In the meantime though, Sinopec’s internal approval from shareholders expired in mid-October, and the company needs to renew this before it can go ahead and launch the CB. It has scheduled an extraordinary general meeting on November 26 for this purpose.
Before Ping An, the largest A-share CB so far this year was the Rmb20 billion ($3.2 billion) offering by China Minsheng Banking Corp in March. The total subscription amount for that deal exceeded $200 billion, which shows the level of interest in A-share CBs.
The demand tends to be underpinned by a general lack of paper, since the Chinese regulators are pretty restrictive with their approvals for new deals. Aside from Minsheng Bank and Ping An, there have been only four other A-share CBs this year, all of which have been smaller than $500 million.
CICC and Credit Suisse Founder Securities are joint sponsors for the Ping An deal. Goldman Sachs Gao Hua has also been involved since shortly after deal was announced, while Guotai Junan and JP Morgan First Capital Securities have been added to the syndicate more recently. The five banks are all acting as joint lead underwriters.