The unpredictable fund-raising habits of Hong Kong companies have been known to give investors many a sleepless night. Will a placement stop the share price in its tracks, diluting earnings and dividends? Or perhaps a steeply discounted rights issue will eat up all your patient gains. The convertible bond can be a good compromise for companies and investors. It avoids the immediate dilution of a share issue so earnings have time to keep up with the enlarged share capital. And equity conversion still allows companies to avoid the burdensome principal repayment of a straight bond. This week's convertible bond issued by second-tier developer K Wah International Holdings seems to serve up the best of both worlds. It only has to pay a token coupon of 50 basis points on its $864 million in bonds. Better still, if it ends up unconverted, only 91.49 per cent of the principal need be repaid. This is a relatively new phenomenon of negative-yield convertibles. Investors would end up with a minus 1.25 per cent yield if they held the bond to maturity. The hybrid nature of convertible bonds traditionally attracts both yield-seeking straight bond investors and the risk-averse equity investors looking for downside protection. K Wah's bond is clearly geared for the latter, as it will behave increasingly like surrogate equity as it gets closer to the conversion price - set at $2.25, a 22.28 per cent premium to yesterday's close - especially given its small coupon. And after one year if the bond trades at more than 125 per cent of the conversion price it will in effect become equity, as then the issuer has the right to force conversion by equity holders. In fact, investors looking for income would be better off buying the underlying stock with its 1.6 per cent dividend yield. Of course unconverted, convertible bonds can still come back to haunt issuers, as New World Development will testify as it scrambles to find $3.3 billion this June. While favourable market conditions play a part in K Wah's deal structure, the financial health of the issuer remains important. K Wah's gearing, at 53 per cent as of last June with $1.3 billion of net debt, looks relatively comfortable. But as this bond is going to be driven by the equity kick-in, it is the earnings outlook of K Wah that is more important to bond buyers. The bet K Wah is hoping will come off is the sale of its three Shanghai property projects starting in the final quarter of this year. JP Morgan expects sales of $2.2 billion from these projects and gross profits of $535 million. Yet the uncertain timing of these earnings over the next three years means it could be tough to get investors to pay up now for these profits. Moreover, the share price has shot up almost 150 per cent in the past year; it could still be a volatile ride. The convertible can solve many of these problems. Now much of the volatility and downside risk has been removed, yet an effective call option on these potentially lucrative property earnings remains. Perhaps a smart way to play mainland property. Existing shareholders should also feel more relaxed, as at least the share price has to go up 20-odd per cent - not down - before they are diluted. And that after all, is what makes everyone happy.