The value of convertible and exchangeable bonds issued so far in 2023 across the Asia Pacific region is up more than 300% as expectations that interest rates will remain higher for longer prompts corporates to look for cheaper funding options.
LG Chem last week issued the largest ever exchangeable bond in Korea when it raised $2 billion in a note that would convert into shares of its subsidiary LG Energy Solution.
The deal pushed the value of the equity-linked products to be worth $5.56 billion so far in 2023, up from $1.37 billion or 305%, from the same time last year, according to Dealogic data.
A combination of higher interest rates and looming debt refinancing schedules from companies across Asia Pacific will mean convertible issue will remain elevated for the rest of the year and into 2024, capital market bankers say.
Convertible bonds are an alternative to equity placements and bond issues, and allow companies with low or no credit ratings easier access to cash than a regular bond issue. An increased number of investment grade companies have tapped the markets in the past few months, according to bankers.
Investors buy convertible bonds because they offer the prospect of equity gains while still paying a coupon, and with their principal repaid at maturity if the option to convert into shares is not exercised.
“This is a great debt replacement trade,” said Christian Lhert, a managing director focused on equity-linked origination at Goldman Sachs in Asia ex-Japan.
“We are in a high interest rate environment and rolling over or refinancing existing debt on balance sheet with conventional bonds or loans will continue to feel expensive. In that context, convertible bonds will look increasingly attractive.”
Citigroup’s APAC Head of Equity-Linked Origination Rob Chan said firms were now expecting global interest rates to stay higher for longer which could impact their future profitability and prompting them to look for alternative funding sources.
“These are companies that had taken advantage of low rates and tight spreads, and relied on bond and loan financing for many years,” he said.
“But due to the sharp increase in interest rates, if they were to go back to those same markets to refinance, it would have a significant impact on their margins,” he said. (Reporting by Scott Murdoch in Sydney; Editing by Stephen Coates)