China Convertible Bond Hype Sees $620 Billion Hunt Each Deal

(Bloomberg) -- A hunt for returns in China is triggering the biggest stampede into convertible bonds since before the global financial crisis.

Investors seized the chance to take part in Shanghai Weaver Network Co.'s bond sale in June, with the deal about 170,600 times oversubscribed -- the highest level since at least 2007, according to East Money Information Co.'s website. The average retail subscription amount for each of this year's 57 deals through May was 4.41 trillion yuan ($624 billion), Haitong Securities Co. analysts wrote in a recent note. That was about seven times more than in the first half of last year, according to the analysts' data.

After regulators last year moved to cool a frenzy for convertible bonds, China's ultra-low interest rates and this year's plentiful liquidity are again fueling demand. The increasingly speculative nature of the market is apparent amid concern China may soon witness its first convertible-bond default. Wild swings in some convertible bonds prompted closer regulatory scrutiny earlier this year.

In two offerings sold on Thursday, YingTong Telecommunication Co. saw the book 114,100 times covered, while Shandong Dawn Polymer Co.'s notes were 90,175 times oversubscribed, according to their filings late Thursday.

“Convertible bonds meet the needs of the market amid declining bond yields,” said He Qian, a fund manager at HFT Investment Management Co., who says more companies will tap the market given the relatively cheap funding available. “For fixed-income investors in the second half of the year, it will be a key source of outsized returns.” Average first-day gains in April and May were 16% and 15% respectively, compared to 9.4% in the first half of last year, according to Haitong.

Investors typically bet on the securities for potential gains on the equity conversion. When a company sells a convertible, existing shareholders have the right to participate in the deal to avoid dilution. And unlike most equity offerings, the bonds don't have lock-up requirements. That means insiders can sell as soon as the first day of trading.

Convertible bond offerings in China are usually hundreds or even thousands of times oversubscribed given limited supply compared to other types of securities, such as corporate bonds or stocks. Investors don't have to pay the full amount of their bids until after they get their allocation.

A key difference in this year's frenzy is that smaller and lower-rated issuers have dominated the primary market in the first half, prompting some caution from analysts. Reduced expectations that the People's Bank of China will ease monetary policy in the second half may also be a negative catalyst, said Wu Jinduo, analyst at Great Wall Securities Co. A gauge tracking China's convertible bonds is down 3.2% from a five-year high it hit in February.

The pipeline for new issuance remains compelling for many investors, however. Another 43 companies have completed the approval process or are close to doing so, with a combined fundraising target of 112 billion yuan, according to Citic Securities Co. More than 100 are also planning issuances, including Daqin Railway Co.'s 32 billion yuan offering.

“Convertible bonds will remain one of our important investment targets, especially those issued by high-growth companies and industry leaders,” Zhang Qian, a fund manager at GF Fund Management Co., said in an email interview. “We will actively subscribe in the primary market.”

©2020 Bloomberg L.P.

With assistance from Bloomberg