The US dollar has long been the currency of choice for Asian convertible bond issuers. But a spate of recent deals suggests the trend is changing. The most recent example is China Railway Construction Corp, which priced a Rmb3.45 billion ($500 million) renminbi-linked convertible bond late on Wednesday.
CRCC's bond sale was the third equity-linked issuance over the last five months where an issuer chose to avoid exposing itself to dollar volatility. It is not hard to see why — as investors and issuers widely anticipate a rise in US interest rates, issuers are opting to avoid the currency as much as they can.
Hong Kong-listed Kunlun Energy was the first to buck the trend this year, selling Rmb3.35 billion worth of bonds in July. Then in November, China Yangtze Power sold a bond exchangeable into shares of China Construction Bank that included a €200 million euro-denominated tranche.
But CRCC is arguably the best example to illustrate the shift since it came to market so recently. The company made its debut with a $500 million convertible bond at the beginning of the year, but set a rare case this week by tapping the Asian equity-linked market twice within a year. And this time, the state-owned railway builder was careful to reduce its currency risk.
The A3/A- rated company pushed the currency risk onto bondholders by structuring the bond in a CNH-linked format. The final payment will remain US dollar-settled, but it will be calculated with USD/CNH spot rate at the put and maturity date. In other words, the issuer has created a synthetic renminbi convertible bond.
When the new deal was launched, it was marketed with a five-year maturity, three-year put structure, a 0.5% to 1.5% coupon and yield, and a fixed 25% premium over CRCC’s HK$11.02 Wednesday close. The coupon was eventually finalised at 1.5% and the strike price was set at HK$13.775.
The new deal has a very different structure to the existing bond, which was sold as a zero coupon bond with a 37.5% premium.
Bankers familiar with the situation said the difference was mainly down to the change in the base currency, with the coupon payment made to compensate for the 270bp difference between the three-year CNH cross-currency swap curve, which stands at around 4.2%, and the three-year US dollar swap rate, which was quoted at 1.5%. But there was also some compensation for the additional hedging costs bondholders have to incur in the context of an expected depreciation of the renminbi.
One banker said there was not much price sensitivity since the bond pricing was already quite aggressive even at the cheapest end.
In fact, it was even tighter than A+ rated Kunlun Energy’s CNH-linked convertible bond sold in July, both in terms of yield and conversion premium. This is despite having a credit rating that is two notches lower than the gas producer.
But the deal was supported by CRCC’s soaring share price, which has risen 57% since the company’s first convertible bond issue. As a result, the existing CB is now trading slightly in-the-money. That helped support the new deal, since many existing bondholders felt comfortable about the credit and were happy to buy into the new bond, said bankers.
CRCC was also able to gain an edge over some of the existing convertible bonds in the market as it secured an A3 standalone bond rating from Moody’s before deal launch.
In the end the deal generated about $1.2 billion worth of orders from nearly 50 accounts.
The underlying credit assumptions of the new bond included a bond floor of 85% and a 25% implied volatility based on a 150bp credit spread and stock borrow at general collateral level.
CICC and JP Morgan were joint bookrunners of CRCC’s convertible bond sale.
