01 February 2018
Asia's turnaround has perhaps been the most remarkable: following total issuance in 2017 and 2016 of approximately USD 7.5bil in each of those years, 2018 has seen USD 6.9bil in January alone across 10 deals (ex-Japan and Chinese domestic). At one point January's issuance had even looked like it would exceed those annual totals, until the last deal of the month, China Evergrande 4.25% 2023, was completely re-configured and downsized at launch from approx. USD 3bil to a "mere" USD 2.3bil deal (HKD 18bil). China Evergrande and two other jumbo deals, Country Garden (HKD15.6bil/USD 2bil) and CSIC into PSBC (USD 1bil), together accounted for the majority of the issuance, which was formed predominantly of Chinese H-share issues. Real Estate sector issuers accounted for five out of seven deals (USD 5.2bil out of 6.5bil).
A combination of rising interest rates, credit spread widening and high equity levels in China have all contributed to the relative attractiveness of the asset class and have also resulted in a surge of domestic (A-share) convertible issuance. November and December 2017 saw issuance totalling CNY 72bil (USD 11.4bil) across 26 deals (Issue size>CNY 500mm). The A-share CB market capitalisation grew from approx. USD 11.9bil as of 1st July 2017 to 25.7bil as of 10th Jan 2018. Furthermore, there is a potential pipeline (CSRC + AGM approved) in excess of USD 60bil. Government policy is helping to drive the supply of A-share CBs with the opening up of the onshore market to foreign investors (eg, via Bond Connect programme) and the discouragement of off-shore capital raising, with approvals for such being apparently harder to obtain. Interestingly, it is perhaps precisely because of the latter that we are witnessing the current surge of H-share converts, with Issuers taking advantage of the opportunity whilst the window remains open. This may also account for the rise in bonds structured with a term of just under one year, which do not require regulatory approval (Country Garden, CIFI, Powerlong, Future Land).
In the US, there have been 13 new issues totalling USD 5.7bil. That compares to USD 3.8bil for the same period in 2017 and an average of USD 1.7bil for the 5 Januarys prior to that. Average monthly issuance over the last six years comes in at USD 3bil (8.7 issues). The two largest benchmark deals came at either end of the month, with Sempra's USD1.5bil Mandatory kicking things off on the 2nd January and Western Digital's USD 1bil bond last Monday (29th Jan). The latter was marketed with coupon and premium ranges of 1-1.5% and 40-45% and fixed at the cheap end for both.
Europe, by comparison, has experienced a relatively average start to the year; issuance totalled USD 2.2bil (vs USD 1.9bil for 2017, USD 1.2 for 2016) across five issues, the largest of which was the EUR 600m (USD 0.7bil) Cellnex 1.5% 2026. Two issues, Michelin 0% 2023 and Dufry / JP Morgan 0% 2021, continued the recent trend for "cross-currency synthetic bond plus warrant" structures.
The bumper issuance so far, combined with a global back drop of rising rates (e.g. USD 5-year swap rate has increased from 1.7% to 2.58% over the last five months), improving growth forecasts, strong equity valuations and relatively good performance in 2017 all augur well for convertible bonds to be a resurgent asset class in 2018.
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