(Bloomberg) -- Chinese developers are driving convertible bond sales in Hong Kong as analysts warn of a stock price correction.
Seven Chinese companies have sold HK$41.8 billion ($5.3 billion) of the hybrid securities this year, surpassing previous full-year totals, according to data compiled by Bloomberg. Led by China Evergrande Group's record sale this week, five developers have priced convertibles, which typically offer issuers cheaper funding than straight bonds.
A 17 percent jump in property company shares in January, after an almost doubling in 2017, has made equity-linked financing more appealing for Chinese developers facing higher onshore funding costs and record maturities this year. The window for convertible sales may be limited with Morgan Stanley predicting a “meaningful” dip in the Hang Seng Index within weeks.
“Rising interest rates onshore and offshore, together with buoyant equity prices, set up the ideal environment for new CB issuance,” said Abhishek Rawat, a director at Hong Kong-based China Merchants Securities Investment Management (HK) Co.
READ: What Convertible Bond Watchers Say on Record Hong Kong Market
The surge in offerings from Chinese developers isn't likely to ease the supply pressure from the sector given the relatively small offering size, according to a Bank of America Merrill Lynch report dated Jan. 30.
In the near future, market participants expect more deals to hit the market. Large Chinese state-owned companies may tap the CB market, as well as pharmaceutical and consumer firms, according Nathan McMurtray, Hong Kong-based head of equity-linked products at CLSA Ltd.
The frenzy in issuance could indicate the market is at its peak.
“CB is a bull-market product,” said Ben Sy, head of fixed income, currencies and commodities at JPMorgan Chase & Co.'s private-banking unit in Asia. “When there is significant increase in CB issuance, the market should have rallied a lot, and the stock price tends to near the peak.”
| Issuer | Amount (HK$) | Coupon | Maturity | Conversion Premium/Discount |
|---|---|---|---|---|
| Country Garden | 15.6b | Zero | Jan. 2019 | 20% |
| CIFI Holdings | 2.79b | Zero | Feb. 2019 | 30% |
| Powerlong Real Estate | 1.99b | Zero | Feb. 2019 | 23.5% |
| Future Land | 2.35b | 2.25% | Feb. 2019 | 28% |
| China Evergrande | 18b | 4.25% | Feb. 2023 | 40% |
| Lingbao Gold | 76m | 5.6% | Jan. 2023 | -19.5% |
| China Huiyuan Juice | 1b | Zero | Jan. 2019 | 2.2% |
--With assistance from Narae Kim Kana Nishizawa Emma Dong and Carrie Hong
To contact the reporters on this story: Lianting Tu in Hong Kong at ltu4@bloomberg.net, Crystal Tse in Hong Kong at ctse44@bloomberg.net, David Yong in Singapore at dyong@bloomberg.net.
To contact the editors responsible for this story: Neha D'silva at ndsilva1@bloomberg.net, Finbarr Flynn, Timothy Sifert
©2018 Bloomberg L.P.
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