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SCMP Reporter

Alternatives to share placements have attracted US and European fund investors

Low interest rates and problems in placing secondary offerings  have led many H-share companies to raise funds through US dollar bonds and convertible issues.

H share power producer Beijing Datang Power Generation issued a US$150 million convertible yesterday, while red chip China Travel International Investment placed a $150 million zero coupon convertible.

The issuances come as many mainland companies seek funds for capacity expansions to take advantage of China's strong economic growth.

However, high regulatory hurdles for H shares mean placing secondary shares is usually not an option. The China Securities Regulatory Commission (CSRC) and other mainland shareholders  must give their approval.

Concerns about share dilution often make getting secondary placings approved difficult and time consuming.

This leaves convertible and straight bonds as a more attractive funding option especially given the low interest-rate environment, which means the cost of capital is lower compared with raising funds in the equities market.

While big companies with better publicity would opt for a straight bond, convertibles would be a more suitable choice for the lesser known small- and medium-sized mainland companies, an analyst with a mainland brokerage said.

In addition, obtaining approval from the CSRC for a convertible bond issue was quicker and easier than getting the go-ahead for an equity offering, the analyst said.

In the past, mainland companies were not comfortable issuing convertible bonds because of dilution concerns when the debt was converted into shares on maturity.

But with 'callable' and 'putable' features, convertibles can be redeemed early before conversion takes place.

With callable features, the issuer can buy the debt back from the holder at a predetermined price after a specified period.

With the put option, the holder has the right to sell the bond back to the issuer. Whether the issue will be made callable or putable depends on the bargaining power of the issuers and the bond buyers.

Another issue for convertible bond issuers has been currency movements.

Chinese companies recently have been unwilling to place bonds denominated in yuan as they expect the currency will appreciate, in which case they would be paying bondholders an effectively higher interest rate and principal.

As a result, companies would rather go to the international market instead, with issues denominated in a foreign currency.

For example, China Unicom  had originally planned to issue a straight bond of 10 billion yuan (HK$9.37 billion) but later changed course, issuing a US dollar bond on expectation the yuan may appreciate in the medium term.

Investors, for their part, seem to like mainland convertibles, with strong interest primarily coming from the more conservative United States and European funds which do not have the courage to jump into Chinese stocks.

For international investors, convertibles offer both interest payments and potential upside should the underlying share climb, while straight bonds offer just interest.

The attraction to Chinese  convertible issues now is reminiscent of activity in the sector in Hong Kong and other Asian  economies a decade ago.

The Asian convertible market was very active in 1993 and 1994, driven by demand from European funds which were enticed by the high growth in Asia.

Then, investors were willing to accept convertibles with a lower coupon, anticipating potential upside gains should shares rise.

'We have been advising Chinese issuers to offer an annual coupon rate of 1 per cent,' an analyst with a mainland brokerage said.



Low interest rates prompt H-share companies to release bond issues