Asian convertible issuance up 16% in first quarter, dominated by new Indian deals, say Barclays analysts

By Kenneth Lim

Boston, April 10 - Asian companies issued more internationally marketed convertible bonds in March than any other month this year or last year and the primary market is expected to remain robust, the convertibles research team from Barclays Capital said in a company report.

Convertible bonds from Asia totaled $1.2 billion in March, bringing the issuance for the first quarter of 2006 to $2.9 billion from $2.5 billion in the first three months of 2005, said the team of Haidje Rustau, Luke Olsen and Heather Beattie.

"Technical factors for issuance remain supportive and we expect primary markets to continue to be lively, with perhaps a stronger showing from non-Indian," the analysts wrote.

Foreign-currency convertible bonds from India accounted for 20 of the 24 new issues, with Hong Kong's three offerings and Singapore's one deal forming the remainder.

"Taiwanese, Malaysian and South Korean issuers have been absent from the market, which can perhaps be explained by the lackluster share performance in this quarter," the analysts wrote. "We would expect any sustained recovery in equities to lead to a pick-up in issuance from these countries in the coming quarters."

The average issue size in the first quarter was $120 million, smaller than the average deal in Europe and the United States. Reliance Communication Venture Ltd.'s $500 million offering of 5-year, zero-coupon convertibles yielding 4.65% with a 50% initial conversion premium was the largest issue in the quarter. Ranbaxy Laboratories Ltd.'s 0% convertible due 2011 had the highest initial conversion premium at 60%, or an "effective" 103% if accretion is taken into account, the analysts said.

Industrial companies accounted for 56% of the new deals, followed by pharmaceutical and biotech companies and by telecommunications companies.

The analysts described the Asian deals as "fairly homogenous." Most of the offerings were plain-vanilla five-year papers with zero- and low-coupon premium redemption structures. That meant effective conversion premiums were higher than the 32% average nominal premium at issuance, the analysts said.

"While conversion premiums and YTMs remained largely in line with levels seen in 2005, we saw fewer reset features than in previous quarters and more aggressive terms overall," the analysts wrote.

Advent Capital Management managing director Hart Woodson commented that the active primary market in Asia was encouraging, not just because of the increase in deals but also because there are signs of the market maturing. He said investors are "definitely interested" in the region.

"I think the converts can be quite a good way to play that, obviously... because you have shorter-dated maturities [and] pretty good deltas because there's a lack of hedging opportunities, so premiums are generally low," said Woodson, whose role at Advent includes managing its global strategy. "You can get a good combination for both the outright and hedge player."

Woodson said he expects to see further growth in the area and a broadening of the market both in geography and types of industries.

"As far as global converts are concerned, [Asia's] still only about 5% of the market," he said. "But it looks like it's on its way to doubling that in the not-too-distant future."

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