Convertibles market sees first deal in months, but not yet out of the woods

Data Insight ECM Explorer 8 July

Convertibles market sees first deal in months, but not yet out of the woods

Two top-tier banks on a USD 70m convertible bond (CB). That’s telling of how challenging Asia’s equity-linked bond market has been.

On Monday (4 July), Yeahka Limited [HKG: 9923], a QR-code payment platform, launched its maiden CB — wall-crossed with the help of JPMorgan and Credit Suisse.

As insignificant as the deal may look by sheer size, that’s still worth writing home about as the first Asian CB since April.

In Asia, issuers have raised only USD 2.3bn worth of paper across 26 deals in the first half of the year, according to Dealogic data. That’s a far cry from the USD 23.9bn issued across 78 deals in the first half of 2021, which was an outlier year.

Of the accounts wall-crossed days way before launch — a lengthy and unusual timeframe in stable markets — only half put their money into the note eventually, according to a source familiar with the situation.

“The deal was tough, that’s correct,” the source said. Covered at launch, the offer was around 1.5x subscribed with about 20 lines — all hedge funds — on the book in the end.

A major challenge to deal makers and issuers is the extremely poor secondary trading, with many papers hovering around the 80s. That makes new papers difficult to print unless issuers are desperate enough to compromise on terms.

Still, “I wouldn’t rule out the possibility of some companies seeing acquisition opportunities after recent valuation corrections, and hence needing to raise money to finance expansion,” a rival banker said. “Those would make solid equity stories.”

In the case of Yeahka, terms and structure were designed as modestly as needed to make the deal happen.

The five-year/put-three paper carries a 6.25% yield to put/maturity and coupon, a 22.5% premium over a concurrent delta placement price, and came with USD 23.55m worth of stock borrows. The effective conversion premium, factoring in the reference price that is 15% below the stock’s last close before launch, was merely 4.125%, according to the rival banker.

Guided at a rather academic credit assumption of 800 basis points, a 1% stock borrow, the note’s implied volatility was just 7.2%, versus the stock’s 50-day realized volatility at 60%.

Thankfully, the note was indicated around par the following day, according to the source.

Two investors contacted by this news service said they skipped the deal because it is too small to be liquid in the secondary market.

“It’s difficult to get people to be comfortable with the name,” the rival banker said. Even those who went in, they went in with a leap of faith. “It’s the money that you don’t mind losing…as long as the company doesn’t go bust, this is a hold to maturity bond.”

Alongside Yeahka, JPMorgan did also cross investors about a potential Kintor Pharmaceutical [HKG:9939] CB of roughly similar size together with HSBC, according to the source, the rival banker, a second rival banker, and one of the investors. The source and the first rival banker said the Kintor deal is off the radar for now.

HSBC could not be reached for comment, while a Kintor investor relations official declined to comment.

Looking ahead, the source and the first rival banker said they expect the second half of primary deal flows to be rated at around four to five on a scale of 1 to 10.

“I am cautiously optimistic,” he said. As secondary CB prices recovered a tad lately, dialogues with potential issuers did increase over the past month.

Still, with many Asia CB investors’ portfolios off single digits so far this year, new papers need to be printed at prices competitive enough for investors or they will have plenty of rich yields to pick and choose from in the secondary.

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