The Asian convertible bond market has come of age. Convertibles
are now regarded as a separate asset class and as a vital
part of the corporate treasurer's toolkit when it comes to
financing. From an investment perspective, returns from convertible
outright and hedge funds have been strong over a number of
After 1997 the active Asian convertible market consisted
of some Japanese names and small Taiwanese high tech companies.
The situation in 2004 is very different - Japan is back with
large issues such as Softbank, Sony and Japan Airlines. The
Taiwanese market has diversified and is booming with much
larger technology issues and numerous financial holding companies
issuing more than US$200 million deals such as Chinatrust,
Fubon and Mega.
In 2003 we saw the birth of the Chinese domestic convertible
bond market, and with short-selling regulatory changes expected
in Taiwan and Korea, the markets there are expected to mature
further with the entrance of hedge funds. Recent changes in
Indian regulations have led to new convertible issuance including
ACC and Indian Hotels.
Benefits of Convertibles
Regionally issuance is high and demand is strong. For the
corporates, convertibles offer an ideal solution for raising
capital as they are cheaper from a cash flow perspective than
straight bonds (many pay zero coupon), and as conversion into
shares can only occur at a significant premium to today's
price, shareholders are less concerned about dilution. Convertibles
can also be used to unwind cross-shareholding via exchangeable
bonds whereby the bond issued by "Company A" converts
into the shares of "Company B" ("Company A"
usually already holds the shares of "Company B"
and thus is able to unwind at a premium).
For investors, convertibles offer the security of a bond
with the upside of equity, and, given the increase in issue
size and number of investors, the bonds are much more liquid
than a few years ago. Regionally in Asia we have also seen
an increase in the number of hedge funds that are trading
convertibles, typically buying the bond and selling the stock
short where possible, which helps provide liquidity.
Like ordinary bonds, convertibles are sensitive to interest
rates and credit movements but they also respond to share
prices, equity volatility and possibly foreign exchange movements
(many are US$ denominated bonds that convert into local currency
shares). This means that sophisticated systems and accurate
market data are essential for issuing, trading and understanding
the associated risks. Over the last year we have seen a number
of regional Asian banks and funds investing in this infrastructure
in order to provide better service to their clients and enhance
Convertibles Set to Stay
Globally, 2003 was the second best year on record (after
2001) in terms of volume and convertible bond issuance, with
over US$150 billion worth issued (more than half of which
was from the US). There were over 115 issues from Asia Pacific
totalling more than US$20 billion and the market is predicted
to grow considerably in 2004. At the end of Q1 2004 there
were already more than 50 issues from the region. There is
no doubt that the convertible bond is here to stay and given
the potential it looks like 2004 may be the year of the Asian