A mammoth convertible bond would minimise the dumping of Government-owned shares on the market but could spell disaster if the Hong Kong stock market continued to flounder, analysts say. Most banks competing for the mandate as adviser to Exchange Fund Investment (EFI) - the body charged with liquidating the Government's $158 billion portfolio - advocated the use of convertible bonds to place some of the shares, sources said. However, Deutsche Bank is reported to have offered to issue a 10 billion euro (about HK$87.16 billion) convertible bond, the biggest euro-denominated bond yet assembled. Such a deal would remove about half of the Government's portfolio in one transaction. The bond most likely would have a five-year maturity, before which investors could convert it to the underlying shares if the pricing was in their favour. Analysts said that such an issue could attract a premium over the market price of the shares, but would leave the Government at risk of being left with the shares at maturity, and a substantial loss, if the Hong Kong market traded lower in the coming years. A euro-denominated issue would exploit the huge appetite for euro paper and could add much-needed euro reserves to the Hong Kong Monetary Authority's coffers. It also would avoid the risk associated with a Hong Kong-dollar denominated issue if the yuan devalued. A euro-denominated bond would play to the distribution strengths of the European banks but also would be attractive to US investors, analysts said. Vivendi, France's largest water utility, issued the biggest euro-denominated convertible bond last month, worth 1.7 billion euros. Development Bank of Singapore's bond sale, which was finalised yesterday, also had a euro component. However, most banks are understood to be encouraging EFI to favour the US dollar-denominated bond market because of its deeper liquidity and maturity. Many banks, including Jardine Fleming, had convertible-bond specialists at their presentations to the EFI board last week. Sources said that while a convertible bond was an effective means of disposal, most banks recommended the majority of the shares be disposed of by traditional book-building sales, permitting a large portion of share buy-backs by Hong Kong companies. SG Securities vice-president for convertible bonds, Martin Bradley, said risk-averse investors could be attracted to Asia-linked convertible bonds. 'Convertible bonds offer the upside potential of equity on one side and the down-side protection of a bond on the other,' he said. They were also attractive to a wide range of investors, including dedicated bond funds, equity investors and private bankers, he said.
