8 ASIAN LEGAL BUSINESS CHINA • 亚洲法律杂志-中国版 JUNE 2024 NEWS In recent months, a wave of convertible bond issuance has breathed new life into Hong Kong’s anemic capital markets. Since late May, four major Chinese internet and technology companies - JD.com, Lenovo Group, Alibaba Group, and Trip. com - have successively issued convertible bonds totaling $10.5 billion. Notably, Alibaba’s $5 billion issuance set a record for the largest U.S. dollardenominated convertible bond by an Asian company. This issuance and others have lifted the spirits of Hong Kong’s bankers and lawyers hoping for a prompt revival of Asia’s erstwhile fundraising powerhouse after a persistently subdued IPO scene so far threatened to choke the city’s investment prospects. “The successful issuance of largescale convertible bonds boosts market confidence and attracts more investors, thereby increasing trading volume and liquidity in Hong Kong’s capital market,” notes Tian Mingzi, a partner at Jingtian & Gongcheng based in Beijing. In particular, the issuance of convertible bonds has given rise to new business opportunities that may enable other 可转债成为中概股近期“心头好” WHY CONVERTIBLE BONDS ARE THE NEW DARLING OF CHINESE COMPANIES companies to follow suit in Hong Kong, thus further enhancing the market’s activity and international influence, Tian adds. Convertible bonds are a financial instrument with both debt and equity features that allow holders to convert bonds into the issuing company’s common stock under predetermined conditions and prices. The issuance of convertible bonds by China concept stocks is not something new. But what makes the latest round unusual is a combination of global macroeconomic pressure and China’s policy directives. “Amid the current high interest rate environment, the low stock prices of China concept stocks, and China’s supportive policies for overseas financing and outbound business expansion, these companies are issuing convertible bonds to improve their debt structure, expand overseas operations, and repurchase shares,” explains Tian. Taiki Ki, a capital markets partner at Linklaters in Hong Kong, points out that the trend of companies issuing equitylinked financing instruments “has been seen globally over the past few years in a rising interest rate environment” albeit taking longer to take hold in Asia given “challenging market conditions for Chinese equities”. “However, with the recent rebound in Chinese equities, we are seeing significant renewed interest in this product in 2024,” notes Ki. For issuers, one of the primary attractions of convertible bonds is their low funding cost. As the U.S. Federal Reserve stands still on “higher for longer” interest rates which have propped up the U.S. dollar, pure debt financing for issuers through bonds or loans continues to be relatively expensive. Under this circumstance, equitylinked instruments such as convertible bonds will remain popular as the value of the embedded equity will lower interest payments, according to Ki. Take Alibaba as an example: The interest rate on its recent convertible bond is 0.5 per cent. However, the rate on comparable term ordinary bonds previously issued by Alibaba would have exceed 5.1 percent, according to estimates from market institutions. Another perceived advantage of convertible bonds is the instrument’s ability to help well-performing domestic companies expanding overseas gain higher access to foreign exchange reserves and reduce transactional losses caused by exchange rate fluctuations. In addition, convertible bonds have been increasingly winning the favour of investors. Apart from lowering interest payments in a high-rate environment, “such instruments offer significant arbitrage opportunities between the bond and the underlying equity for certain types of fund investors, allowing such investors the ability to manage volatility arising from external factors such as market movements and for issuers from certain regions and political tensions,” Ki adds. Given these characteristics, convertible bond issuances tend to be popular amongst industries such as technology, internet, new energy, and biotech. The recent wave of convertible note offers have had a notable common feature: Issuers such as JD.com, Alibaba, and Trip. com have concurrently executed share buybacks in a bid to ease any dilution effect. Indeed, there has been initial skepticism that any future conversion of bonds into shares might dilute the company’s By Hu Yangxiaoxiao, Sarah Wong 作者：胡阳潇潇、黄婉君
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