China's Tech Firms Selling Convertible Bonds at Record Pace

(Bloomberg) --

Chinese technology companies are tapping the convertible bond market at an unprecedented pace.

Companies from the industry have raised a record $3.4 billion in convertible bond sales this year, nearly double the total during all of 2018, according to data compiled by Bloomberg. Netflix-style streaming service iQiyi Inc. and the country’s top anime site, Bilibili Inc., were among the latest sellers.

A global stock rally and attractive financing costs are driving the surge of convertible bond sales by Chinese companies, some of which haven’t obtained credit ratings. Investors typically bet on convertible bonds for potential gains on the equity conversion, meaning the two markets tend to move in tandem. The Dow Jones Industrial Average has risen more than 20 percent from a December low and is close to its all-time high.

“Many of these companies are not cash-flow positive so it is more challenging for them to access the loan and bond markets,” said Li Zheng, head of equity solutions group for Asia ex-Japan at Goldman Sachs Group Inc. “CB investors have been willing to fund high growth companies because it allows them to participate in the upside with the conversion option.”

China's Tech Firms Selling Convertible Bonds at Record Pace

The securities also provide companies a fundraising option in the event that initial public offering results don’t meet top-line expectations. NIO Inc., a Chinese competitor to Tesla, sold $650 million of convertibles in February, months after pricing its U.S. IPO near the bottom of a marketed range.

“2018 was a challenging year for markets, with some companies unable to raise as much as they may have wanted through their IPO,” said Jennifer Choi, director of equity-linked origination at Credit Suisse Group AG. “Some issuers finance preemptively without immediate funding needs. They prefer to opportunistically tap the market when it is constructive, as it is now.”

Chinese firms that listed overseas in 2018 raised a record $4.3 billion selling additional shares and convertible bonds within the first year of going public, according to data compiled by Bloomberg. Convertible bonds made up of more than 60 percent of the additional fundraising volume for these newly public firms, the data show.

China's Tech Firms Selling Convertible Bonds at Record Pace

Lower borrowing costs have lured more established companies to convertible bonds over other fundraising methods. Lenovo Group Ltd. in January sold $675 million of convertibles with a coupon of 3.375 percent, compared with the 4.75 percent on straight bonds with the same tenor it sold last year.

The volume has also been boosted by Chinese companies taking advantage of a structure, more common among U.S. firms, that allows them to use rosier valuation targets than investors would otherwise accept. The method involves selling bonds to investors using a lower conversion price, while making a side deal with investment banks that effectively resets the conversion price at a higher level.

Companies like NIO use the structure, known as a call-spread overlay, to reduce the chance of their stock being diluted. iQiyi has raised $1.95 billion in two convertible bond sales backed by the structure.

The Chinese streaming site’s first convertible offering priced just eight months after its March 2018 U.S. IPO as it sought to replenish its coffers amid fierce competition in the country’s online video industry.

New economy firms -- including tech, internet and biotech companies -- will continue to need capital for growth after their IPOs, said Anvita Arora, head of Asia Pacific equity-linked origination at Bank of America Corp.

“It’s a very different type of animal from the old economy companies,” Arora said. “A lot of the high-growth companies need to keep raising cash. If the stock price performs, which the company expects it to do, there’s an automatic deleveraging which is also attractive.”

©2019 Bloomberg L.P.