YES, WE’RE OPEN
Convertible bonds remain hot.
By Don Durfee

Since the subprime crisis erupted last summer, various part of the capital markets have shut their doors to issuers. One exception, so far: convertible bonds. In Asia, 2007 issues rose 46 percent compared with 2006, according to Thomson Financial.

Convertible bonds, of course, are a traditional refuge for investors during times of stock volatility. The embedded option of swapping the debt for the borrower’s stock is worth more to investors when markets are volatile. Similarly, that option means that when credit spreads are widening—as they have been lately—the market price of a convertible won’t fall as far as that of regular bonds.

In Asia, there have been some big issuances lately. The biggest of all was a US$4.2 billion issue by Chinese oil company Sinopec in late February. Another large deal closed in January, when CapitaLand, Singapore’s largest listed real estate developer with significant holdings in China, raised US$915 million.

For issuers, convertibles hold a number of attractions. It’s still possible to do large deals with long terms. CapitaLand’s bond, for example, has a 10-year term with a put at 7 years (last year, the company issued a 15-year convertible bond with puts at 10 and 12 years). Other advantages, says Luke Olsen, head of convertible bond research with Barclays in London, include a highly diverse investor base and an ability to issue debt without a credit rating. And because of widening credit spreads and equity volatility, typical new issue coupon rates are improving relative to other bonds—this “cash interest saving” grew by 1-2 percent in 2007, according to Olsen.

Still, market conditions have taken a toll. Last year, CapitaLand’s bond set a record premium level: a 72 percent conversion premium with a 2.95 percent coupon. Its latest bond, says Olivier Lim, group CFO, fetched a respectable but lower 46 percent premium and a 3.125 percent coupon. Maartje Bus, head of ABN Amro’s equity-linked Asia team, adds that while deal flow has been “decent” recently, “it is not possible for all to tap this market at the moment.”

The way to think about this market is as one of the best of a series of expensive alternatives. “At a certain price, the convertible bond market is essentially open,” says Olsen. “Is it in rude health? Not really. But at least it’s a viable and in many cases attractive option.”