Attractive terms could drive more issuance of convertible debt in China. Depressed share prices, high interest rates, and a lack of supply of offshore Chinese bonds are creating favorable conditions for the issuance of such instruments. In the past month, three Chinese issuers issued a combined US$8.5 billion of these securities, accounting for nearly 60% of total Chinese offshore corporate bond issuance in the year to date. More issuance should come. While we view the instruments as fully debt and thus as immediately credit negative, longer term they could be credit positive, if conversion kicks in.
The issuances from JD.com Inc. and Alibaba Group Holding Ltd. have had minimal impact on our assessment of the credit ratings on the entities.
Table 1
| A breakdown of recent China tech offshore convertible bond issuance | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Issuer | Rating | Offering (mil. US$) | Overallotment (mil. US$) | Total issuance (mil. US$) | Coupon | Maturity | Conversion premium* | |||||||||
|
JD.com Inc. |
A-/Stable/-- | 1,750§ | 250 | 2,000 | 0.25% | Jun-29 | 35.0% | |||||||||
|
Alibaba Group Holding Ltd. |
A+/Stable/-- | 4,500 | 500 | 5,000 | 0.50% | Jun-31 | 30.0% | |||||||||
| Trip.com Inc. | Unrated | 1,300 | 200 | 1,500 | 0.75% | Jun-29 | 32.5% | |||||||||
|
Lenovo Group Ltd. |
BBB/Stable/-- | 2,000 | 0 | 2,000 | 0.00% | 2027† | N/A | |||||||||
| *JD.com conversion premium is based on share price of HK$132 as of May 21, 2024. The Alibaba conversion premium is based on an ADR price of US$80.8 as of May 23, 2024. The effective conversion premium is 100% considering Alibaba's capped-call transactions. Trip.com conversion premium is based on ADR price of US$50.16 as of June 4, 2024. Lenovo's initial conversion price of HK$10.42 per share is below its current share price of HK$10.74 as of June 14, 2024. §The final CB issuance was increased from an initial proposed amount of US$1.5 billion. †Convertible note offering has not yet been completed. The notes will mature three years following issuance. N/A--Not applicable. Sources: S&P Global Ratings, company filings. | ||||||||||||||||
What's Happening
Convertible bonds are attracting issuers while tapping fresh pools of investors. High interest rates and robust investor demand create favorable conditions for convertible notes. Strong investor demand for such issuance results in tighter conversion premiums and lower coupons.
Issuers can somewhat offset share dilution by entering capped-call transactions, for a cost. Issuers can further reduce share dilution--or reverse it completely--by buying back shares at a price below the conversion price of the notes.
Equity and fixed-income investors may be drawn to convertible transactions. Equity investors may find the conversion option attractive, given it is benchmarked off currently low valuations. Many Chinese issuers have experienced share price declines of more than 50% since 2021; forward price-to-earnings multiples are at historical lows.
Such convertible issuance also gives fixed-income investors opportunities to increase China exposure, which has been challenging given the lack of offshore Chinese bond issuance over the past 24 months.
Why It Matters
The credit implications of convertible bonds are not straightforward. We view the securities as 100% debt. Only in a few scenarios would we assign equity content to the instrument. For example, if convertible notes have mandatory conversions, among other conditions.
The credit impact of such issuance will depend on the use of proceeds. In the near-term, if the use of proceeds is for share repurchases or large investments, the effects are likely to be credit negative. However, if the instruments are used to retire more expensive debt, they could be moderately credit positive given interest-cost savings.
Convertible issuance could be credit positive as it approaches maturity. If conversion premiums are low, such that conversion is likely, and the issuer does not spend significantly more than the issuance, the hybrid bonds will likely reduce leverage as they approach maturity.
- In the case of JD.com and Alibaba, the use cases are mostly for share repurchases; however, given their large net cash position such issuance has minimal impact on our assessment of our ratings on the entities.
- Lenovo Group Ltd.'s proposed US$2 billion issuance of convertible notes to strategic investor Alat is different and unrelated to other recent Chinese convertible issuance. By issuing a convertible note, Lenovo is likely seeking to minimize immediate share dilution. At the same time, by setting the conversion price below the current share price, Lenovo positions Alat with a likely eventual equity stake in the firm.
What Comes Next
More convertible issuance could be on the horizon. With convertible bonds luring issuers and investors, we see the potential for more convertible bond issuance. Investors will pay particular attention to the use of proceeds and conversion premium when assessing the credit impact.
Related Research
- Lenovo, PC companies face rising geopolitical risks, May 29, 2024
- Alibaba's Proposed U.S. Dollar-Denominated Senior Unsecured Convertible Notes Rated 'A+', May 23, 2024
- JD.com's Proposed U.S. Dollar-Denominated Senior Unsecured Convertible Notes Rated 'A-', May 21, 2024
This report does not constitute a rating action.
| Primary Credit Analyst: | Clifford Waits Kurz, CFA, Hong Kong + 852 2533 3534; clifford.kurz@spglobal.com |
| Secondary Contacts: | Sandy Lim, CFA, Hong Kong 2533 3544; sandy.lim@spglobal.com |
| Charles Chang, Hong Kong (852) 2533-3543; charles.chang@spglobal.com |
No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.