Chinese bank raises more than $7bn with record convertible bond

Shanghai Pudong deal draws more than $1tn of orders as issuance of equity-linked instruments surges

A Chinese bank has placed a record convertible bond, raising more than $7bn in an offering that drew more than $1tn worth of orders, the latest bumper deal in a year that has seen the issuance of the equity-linked instruments hit a fresh high in China.

The Rmb50bn convertible bond offering from Shanghai Pudong Development Bank was about 330 times subscribed, according to a stock exchange filing on Monday evening.

The Shanghai Pudong deal tops the previous record of $6bn raised for a convertible bond from state-run Citic Bank that priced in February and is the seventh this year to raise more than $1bn, according to data from Dealogic.

Convertible bonds offer investors the right to swap them for equity if a company’s shares rise to a certain price. Investors normally receive a lower coupon on convertibles than standard bonds in exchange for the option to own stock down the line.

Issuance of convertible bonds by Chinese companies has hit a record of $39.3bn in the year to date, up more than 80 percent from the full-year total in 2018, according to Dealogic. The average deal size has also risen to $360m in 2019 so far, up 44 percent from last year.

For companies, convertible bonds are a way to raise money more cheaply than through a straight debt sale, and without immediately diluting shareholders’ equity. Shanghai Pudong’s Shanghai-listed stock closed up about 0.6 percent on Tuesday.

Yulia Wan, a senior analyst at rating agency Moody’s, said the market for convertibles in China had picked up thanks in part to more stringent requirements for capital raising, as regulators grapple with rising corporate debt and seek to rein in financing done off-balance sheet.

“Convertible bond issuance has faster approval processes and more flexibility compared with other measures such as secondary [stock] offerings,” she said.

Regulators have grown wary of unchecked corporate debt issuance in China after a record number of corporate bond defaults in 2018. Chinese property developers alone have more than $571bn in outstanding bond issuance, almost $400bn of which comes due in the next three years.

Another key feature of convertibles, said Ms. Wan, was that conversion levels for these bonds in China could be reset later on — in other markets they are typically fixed. The flexibility increases the likelihood of the bonds eventually becoming equity.

China’s stock market performance this year has also made the prospect of owning equity more attractive to domestic investors. The Shanghai Composite index has risen 18 percent this year while Shanghai Pudong’s stock is up by almost a third.

Source: Financial Times

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