Low rates, volatility prompt rush for Asia's convertible bonds

February 23, 2021: Asia has recorded the strongest start to the year for convertible bond deals in three years, and more is on the cards as low-interest rates and financial market volatility point to a robust pipeline of future issuance, according to data and advisers.

Convertible bonds are an alternative to equity and bond issuance and allow companies with low or no credit ratings easier access to cash. The rush underscores investors betting on the liquidity-driven stock market rally to continue.

In Asia, there has been $8.42 billion worth of the bonds issued since January 1, the highest level since 2018 when $10.7 billion worth of deals were carried out in that time frame, Refinitiv data shows.

Investment bankers said high growth companies with negative cashflow, predominantly tech and electric vehicle firms, were expected to keep tapping convertible bonds to secure cash, capitalizing on the bullish investor sentiment.

Companies likely to benefit from the world's re-opening from the pandemic would also be active participants in the markets, they said.

Low global lending rates have led to a rising number of convertibles in Asia with a zero-coupon, meaning investors are not paid interest while they hold the debt.

"We will have more zero coupons going forward in Asia, that trend will continue," said Gaurav Maria, JPMorgan head of equity-linked and private capital markets for the Asia Pacific.

"It's hard to say what percentage there will be - it's a function of what kind of issuers are coming to the market. Large and high-quality issuers will not expect to pay coupons if that is not required."

Bank of Shanghai raised $3.1 billion in January using convertibles, while electronic vehicle maker NIO Inc secured the largest offshore transaction of $1.3 billion in the first fortnight of the year.

With zero coupons, investors buy the bonds for the prospect of securing future equity gains when the instruments convert into stock. They would also have their principal repaid at maturity if the option to convert into shares is not exercised.

"Convertible debt is an attractive funding choice when share prices are high, interest rates are low and volatility levels are reasonably elevated," said Saurabh Dinakar, Morgan Stanley head of Asia Pacific equity-linked solutions.

"We had an expectation that issuances volumes would remain elevated but we have been surprised at how rapidly the pipeline has developed and how it continues to develop."

Reuters