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

By Scott Murdoch

HONG KONG, Feb 23 (Reuters) - Asia has recorded thestrongest start to the year for convertible bond deals in threeyears, and more is on the cards as low interest rates andfinancial market volatility point to a robust pipeline of futureissuance, according to data and advisers.

Convertible bonds are an alternative to equity and bondissuance and allow companies with low or no credit ratingseasier access to cash. The rush underscores investors betting onthe liquidity-driven stock market rally to continue.

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

Investment bankers said high growth companies with negativecashflow, predominantly tech and electric vehicle firms, wereexpected to keep tapping convertible bonds to secure cash,capitalising on the bullish investor sentiment.

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

Low global lending rates have led to a rising number of theconvertibles in Asia with a zero coupon, meaning investors arenot paid interest while they hold the debt.

"We will have more zero coupons going forward in Asia, thattrend will continue," said Gaurav Maria, JPMorgan headof equity-linked and private capital markets for Asia Pacific.

"It's hard to say what percentage there will be - it's afunction of what kind of issuers are coming to the market. Largeand high quality issuers will not expect to pay coupons if thatis not required."

Bank of Shanghai raised $3.1 billion in Januaryusing convertibles, while electronic vehicle maker NIO Incsecured the largest offshore transaction of $1.3 billionin the first fortnight of the year.

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

"Convertible debt is an attractive funding choice when shareprices are high, interest rates are low and volatility levelsare reasonably elevated," said Saurabh Dinakar, Morgan Stanleyhead of Asia Pacific equity linked solutions.

"We had an expectation that issuances volumes would remainelevated but we have been surprised at how rapidly the pipelinehas developed and how it continues to develop."(Reporting by Scott Murdoch; Additional reporting PatturajaMurugaboopathyEditing by Shri Navaratnam)