Asia Debt:Asia Convertible Issuance Calm;Mkt Awaits More
By ALISTAIR MACDONALD
A Dow Jones Newswires Column
LONDON -- This is a tricky time for Asian convertible bond issuers thanks to volatile stock prices around the region and a temporary glut of supply following a large issue by Cable & Wireless PLC (U.CW) exchangeable into shares of Pacific Century Cyberworks Ltd.(PCW).
As a result, companies looking to raise capital through these instruments are having to think carefully about timing.
"(Asian) issuance will continue - these companies need the cash. But with equity markets so volatile, it will be opportunistic, not on a timetable," said Brian Kelly, head convertibles trader at Commerzbank in London.
A case in point: Taiwanese disc maker Ritek Corp. (Q.RTK) has been waiting for a chance to release a $250 million-$300 million convertible bond since early last week. But one source close to the deal explained recently that there's a temporary chill wind blowing through the market. "This is not necessarily the best background to issue the deal," he said.
Ritek's financial comptroller said Wednesday that the deal is still slated for completion by the end of the month. "We want it to happen soon and are watching for a window of opportunity," said Glenda Chen. She added that the Ritek deal may break from recent pricing precedent, although she declined to offer specifics.
"We've referenced the structure of earlier deals by Acer Communications and Yageo, but the conversion premium likely won't be in the same range as those deals," she said.
Ritek's patient vigil over the market underscores the stop-and-go nature of the convertible bond sector for Asian issuers. The market was going gangbusters through March, before conditions cooled suddenly after C&W'S $1.5 billion zero coupon bond exchangeable came to market April 2. The C&W bond trades around 2% below issue price and anecdotal evidence suggests much of the issue remains unsold.
Still, overall this has been a good year so far, with a healthy $3.3 billion in Asian convertible bonds issued. Moreover, analysts say the market is likely to remain buoyant going forward, as European appetite for these instruments stays healthy.
One of the key developments likely to ensure long-term vibrancy for this market is a shift in the way investors view convertibles. Two years ago, fund managers tended to "play the market" for coupon yields. Now investors are more impressed by the defensive qualities of these bonds, notes Anja Eijking, at Achmea Global Investors.
Many of today's issues offer downside protection via a series of yearly puts that allow nervous investors the option of redeeming their bonds for cash.
This is important because stock indexes remain anything but stable. The MSCI Asia Pacific excluding Japan equity index, for example, has fallen more than 12% since the start of March.
The new approach to convertibles reflects lessons learned by European investors, who account for the brunt of demand for Asian convertibles. In both 1994 and 1996 there was a surge of Asian issuance which ended in big losses for investors when confidence in the region evaporated and values shrank.
Issuance hit GBP20.6 billion in 1994 and GBP23 billion in 1996, according to Capital Data.
Volumes aren't likely to recover to such lofty heights any time soon, meaning what issuance there is should represent better value.
"The economic context is different, the euphoria
behind China and the whole tiger economies has gone," said Commerzbank's Kelly.
One sign of the times is lower conversion premiums. Convertible investors pay an extra premium over market rates for their equity option. The higher that price, the higher the underlying shares have to travel before the equity option is "in the money."
Credit worries still hover over many Asian corporates. But poor ratings don't always damp demand.
March's Chartered Semiconductor Manufacturing Ltd (P.CSM) 2.5% issue did not suffer even after Moody's investors initiated the company at BBB-, one notch off a junk rating.
The company saw so much demand that it was able to increase the size of the issue to $575 million from an initial $350 million.
"The rating was no surprise. This deal highlighted that there is demand for well priced convertibles in interesting names," said David Rogers, fund manager at Axis Capital Management.
The increasing presence of strong asset-swap bids for Asian credits has provided further comfort for investors. Asset-swaps allow investors worried about credit default to strip out the bond component of a convertible and sell it on while retaining the equity option.
These defensive qualities have ensured that the Asian market has outperformed both Europe and the U.S. The UBS Warburg convertible bond index showed a 2.9% gain in Asia excluding Japan, a 2.3% fall for European issues and an 8.4% fall in the U.S.
-By Alistair MacDonald, Dow Jones Newswires; 44 020 7842 9270; alistair.macdonald@dowjones.com
-0- 11/04/01 08-07G
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