Strong Asian CB pipeline despite pause

Up to $1.5 billion-worth of new convertible bonds are waiting for an opportunity to come to market but US-listed names still able to launch deals.
Chinese tutoring company TAL Education sold a $200 million convertible bond late last week.
Chinese tutoring company TAL Education sold a $200 million convertible bond late last week.

The recent weakness in Asian share prices has made it less attractive for companies to sell convertible bonds but year-to-date issuance is still substantially higher than in 2013 and up to $1.5 billion of new issuance is waiting to get done, according to a leading convertible bond banker.

For now, many Asian issuers are taking advantage of continued low interest rates to raise cash through straight bond sales instead of issuing convertible bonds, though the equity-linked window remains open for some US-listed names, such as Chinese tutoring company TAL Education, which trades on the New York Stock Exchange and sold a $200 million convertible bond late last week.

Conditions were ideal for convertible bond issuers earlier in the year, when rising share prices and interest rates made it an easy choice for companies with volatile stocks and a decent credit profile. As a result, more than a dozen Asian issuers tapped the convertible bond market during the first four months of the year, raising more than $4 billion — twice as much as had been raised at this point last year, according to Bloomberg data.

But May has so far been quiet. TAL is the first company to sell a marketed convertible bond this month. The deal got away on Friday morning (Asia time), printing in the middle of the marketed range with a 30% premium over the May 15 closing price and a 2.5% coupon.

TAL used a common structure for issuers in the US market, featuring a five-year maturity and three-year investor put option. It also bought a call spread to achieve a higher coupon and higher premium, which was possible due to the much greater liquidity available in the US market.

It launched with a base deal of about $200 million plus an upsize option of $30 million, which is likely to be exercised as the deal was two-and-a-half times over-subscribed, the Hong Kong-based convertible bond banker told FinanceAsia.

Stock borrow was available at a general cost of 50bp. Investors used a credit spread of around 700bp and with an implied volatility of 28.5% this gave a bond floor of 88%. Fair value was at 105 and the bond was said by dealers to be trading up at around that level on Tuesday.

The deal wasn’t without its hiccoughs as the company’s share price lost a fifth of its value during bookbuilding, but it quickly recovered and closed at $22.76 on Tuesday.

Deutsche Bank, JP Morgan and Morgan Stanley were joint bookrunners.

Plenty of other Asian companies are also waiting to sell convertible deals. According to the Hong Kong banker, the pipeline is between $1.2 billion to $1.5 billion, with attention focused on Southeast Asia, including some expected issuance from Thailand.

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