Ping An Insurance (Group) has received regulatory approval to issue up to Rmb26 billion ($4.2 billion) of domestic convertible bonds, according to an announcement on the Hong Kong stock exchange website on Thursday evening.
The company, listed both in Hong Kong and Shanghai, first announced plans for the CB in December 2011 so it has been a long wait. However, the timing of the approval is a bit surprising as observers hadn’t expected the insurer to get the go-ahead from regulators until after Sinopec had issued its planned domestic CB of up to Rmb30 billion.
Sinopec, 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 complete the deal. The company’s internal approval from shareholders expired in mid-October, but Sinopec is asking them to extend it for another 12 months at an extraordinary shareholders meeting on November 26.
The expectation that Ping An would have to wait for Sinopec was based on a belief that the regulators would want to see how well the market is able to absorb one major deal before approving another multi-billion dollar transaction. Based on the proposed size, both of these deals will exceed China Minsheng Banking Corp’s Rmb20 billion ($3.2 billion) transaction in March, which is the largest A-share CB to come to market this year.
Domestic Chinese CBs are very equity-like as they come with low conversion premiums – typically no more than 5% versus the latest market price as most issuers fix the conversion price at the regulatory floor, which is either the 20-day volume-weighted average price (VWAP) or the VWAP the day before the announcement of the terms.
Together with the downside protection and the annual coupons, this makes them popular with investors. And since the regulators don’t approve that many CBs per year, each deal tends to attract huge demand. According to sources at the time, the Minsheng Bank CB received more than $200 billion worth of orders, highlighting the strong appetite for good quality A-share paper.
The Ping An deal, which as per earlier announcements will have a six-year maturity, is interesting because the CBs will be treated as equity even before conversion. This is a possibility open to insurance companies, depending on how the local regulators interpret the guidelines. Ping An is the first company in China to receive approval to treat its CBs this way.
When it first announced the plans for the deal in December 2011, Ping An said the CB would help to boost its solvency margin ratio, which has come under pressure as its various business segments are experiencing rapid growth. It also noted that it needs to increase its risk buffers as the domestic Chinese economy is facing a slow-down in growth and an increased risk of policy shifts as economic uncertainties persist.
While almost two years has lapsed since then, all of that still hold true.
Since the initial announcement, Ping An’s Hong Kong-listed shares have traded in a range between HK$50 and HK$70 and on Thursday closed in the middle of that range at HK$61.25. The stock has recovered from a low of HK$48.84 in early July, but is still down 5.6% year-to-date.
CICC, Credit Suisse Founder Securities and Goldman Sachs Gaohua are joint bookrunners for the Ping An CB.
The same banks, together with Citic Securities and Deutsche Bank’s Chinese joint venture Zhong De Securities, are also mandated for the Sinopec transaction.