Convertible bonds in Asia are experiencing a surge as companies prepare for more affordable financing options
With the expectation that interest rates will stay higher for longer, corporates are looking to save money by using cheaper sources of funding, the value of convertible and exchangeable bonds issued so far in 2023 throughout the Asia Pacific region has risen more than 300%. LG Chem's issuance of a $2 billion note that would be converted to shares in its unit, LG Energy Solution, last week marked Korea's biggest exchangeable bond issue.
According to data from Dealogic, this transaction has increased the equity linked product's value by $1.5 billion or 305% year on year and now stands at $5.56 billion in 2023. Capital market bankers say the combination of rising interest rates and upcoming debt repayment schedules for companies throughout Asia Pacific means that conversion issues are set to rise further over the next year and beyond.
In contrast to equity and bond issuances, convertible bonds allow companies with low or no credit ratings to access cash in an easier way than is the case for a normal debt issue. According to bankers, over the past few months an increased number of companies with investment grade status have taken up markets.
If an option to convert shares is not used, investors would buy convertible bonds because they offer the possibility of capital gains while still paying a coupon and with principal repaid at maturity. "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're in an environment of high interest rates, and the cost of rolling over or refinancing existing debt on the balance sheet with conventional bonds or loans will continue to be high, and convertible bonds will become increasingly attractive." According to Citigroup's Head of Asia Pacific Equity Linked Origination Rob Chan, the companies are beginning to expect that US interest rates will keep rising for an extended period which would influence their future profitability and lead them to seek other funding sources.
He said, "They are companies which have been taking advantage of low interest rates and high spreads for a number of years by relying on bond and loan funding." "In fact," he said, "if they come back to those markets for refinancing it will have a significant impact on their margins because of the steep increase in interest rates."