Convertible Bonds Surge in Hong Kong Amid IPO and M&A Slowdown

Convertible bond issues are gaining traction in Hong Kong as mergers and acquisitions (M&A) and initial public offerings (IPOs) have largely stalled. This month alone, issuers have raised over $9 billion in convertible bonds denominated in US dollars, setting a record for the region.

Why this matters: The surge in convertible bond issues in Hong Kong has significant implications for the global financial market, as it reflects a shift in corporate financing strategies. This trend may lead to increased activity in the bond market and impact the overall economy.

Key players in this trend include Alibaba Group Holding Ltd, JD.com Inc, and Lenovo Group Ltd, which have accounted for almost all the proceeds. Alibaba's $5 billion convertible bond issue stands out largest among them. Taiwan's Hon Hai Precision Industry Co also launched a significant convertible bond issuance spree, aiming to raise up to $700 million.

The shift towards convertible bonds is largely driven by the flexibility they offer in raising funds cheaply without immediate stock dilution. This is particularly attractive for companies looking to finance buybacks or other strategic initiatives. Convertible bonds also provide an opportunity for hedge funds to profit from arbitrage between the bond and the stock.

Interest rate payments on convertible bonds are typically lower than on regular debt, making them an attractive option in a high-interest-rate environment. "We would expect more liquid companies that have access to capital markets at nearly zero cost through CBs to come to market," said Christina Ma, head of global banking for Asia Pacific at HSBC Holdings Plc.

Selina Cheung, co-head of Asia equity capital markets at UBS Group AG, noted, "What these companies did was basically a very good way to get money and buy back shares." This sentiment was echoed by Rob Chan, head of equity linked origination for Asia Pacific at Citigroup Inc, who said, "The hedge fund investors of the convertibles need to short stock as a hedge, and the company can take advantage of that supply of shares to execute a highly efficient buyback."

The rebound in Chinese equities, particularly those traded in Hong Kong, is making the market appealing for convertible bond issuances. Additionally, the end of years of negative rates in Japan is driving interest in these financial instruments. Historically, unrated companies have issued convertible bonds, but given the current high-interest rates, more investment-grade companies are considering this option to reduce ongoing cash coupon costs.

Hong Kong's stock market has shown resilience despite a sluggish economy and dismal IPO volumes. Economic optimism has boosted stocks and improved corporate earnings, contributing to the city's appeal for convertible bond issuances. Hong Kong Exchanges and Clearing (HKEX) is also seeing more listings from the Middle East and mainland China as market sentiment turns bullish.

Thus, the growing popularity of convertible bond issues in Hong Kong reflects a strategic response to the slowdown in M&A and IPO activities. With their flexibility and cost advantages, convertible bonds are becoming an increasingly attractive option for companies looking to raise capital efficiently.

Key Takeaways

• HK convertible bond issues raise $9B in USD, a record for the region.
• Alibaba, JD.com, and Lenovo account for most of the proceeds.
• Convertible bonds offer flexibility and cheap funding without stock dilution.
• Low interest rates and hedge fund arbitrage opportunities drive demand.
• Hong Kong's resilient stock market and economic optimism fuel the trend.