HONG KONG, Sept 5 (Reuters) - China Petroleum & Chemical Corp's (Sinopec) announcement last week of a plan to issue new convertible bonds (CB) -- just six months after making its equity-linked debut -- points to growing interest in the maturing domestic market, IFR, a Thomson Reuters publication reported.
Investors, however, are up in arms at a plan that promotes a selloff in the outstanding bonds and negatively impacts their chances of conversion.
Sinopec , Asia's largest oil refiner, proposed on Aug. 29 an issue of six-year convertible bonds with a coupon of up to 3 percent. The proceeds will be used for liquefied natural gas projects and oil quality improvement projects.
The overwhelming response to its first 23 billion yuan ($3.6 billion) deal in February has encouraged the issuer to consider revisiting the market to build up a war chest for acquisitions.
Sinopec's decision to return to the market after just six months suggests Chinese issuers are finally coming around to accepting the domestic CB market as a viable funding source in the face of global market volatility.
In terms of encouraging others to issue in the CB market to increase diversity, the Sinopec return needs to be seen as a positive. However, contrary to such expectations, Sinopec's plan has, instead, invoked a backlash from investors.
The main complaint is that, because Sinopec shares have fallen since the issuance of its first CB in February, the possibility of the bonds converting into equity has already diminished and plans to issue more paper from a lower base will just exacerbate this predicament.
Investors in China's nascent CB market expect issuers to sell them bonds with low conversion premiums, thereby increasing the chances of converting them into equity. In return, they are willing to accept low coupons and long tenors.
SHARES DROP
Sinopec's A-share price has fallen almost 15 percent since the earlier CBs were issued. As of Sept. 1, its A-shares were at 7.32 yuan, 25 percent below the conversion price of 9.73 yuan per share.
"As the share price of the company has fallen so much, the conversion price of the new CB is very likely to be lower than that of the old one, assuming the company offers a similar conversion premium this time around," said an investor.
Sinopec's previous CB offered a conversion premium of 11 percent at issue.
The bonds dropped 5.6 percent on Aug. 29, the day the plan for a second batch of such paper was announced, and extended losses by another 2.28 percent in the following two days.
It was quoted at 93.47 on Aug. 31. The plunge in Sinopec's CBs set a negative tone in the market, dragging the S&P/Citic Convertible Bond Index, which tracks China's CB market, down 3.64 percent on Aug. 29, the largest single-day decline in nearly 19 months.
"We are very disappointed and upset at Sinopec's decision," said a fund manager, who bought the existing CB. "The company has hurt the interests of the original CB investors. They should hold an investor meeting with key funds of the old CBs to explain the reason for wanting to issue again after such a short time."
Investors have been complaining because they think if the new CBs are issued, the old ones will turn into mere corporate bonds paying a very low coupon and with no equity value.
The old CBs pay a coupon of 0.5 percent for the first year, before rising to 2 percent in the sixth year. Goldman Sachs Gao Hua Securities was the sponsor and joint bookrunner with CICC, Citic Securities Co Ltd , Credit Suisse Founder Securities, UBS Securities and Guotai Junan Securities Co Ltd .
NEGATIVE RESPONSE
The negative response to the new CB plan was expected to force Sinopec to think of either setting attractive terms on the new paper or, worse, cancelling the deal altogether, said bankers.
"Investors are feeling cheated by Sinopec. It definitely makes it more difficult to sell the new deal. The terms have to be much sweeter than the old ones," said a banker.
Some are worried that Sinopec's decision may well change the landscape of the domestic CB market.
"Sinopec's case may encourage other companies to issue CBs on the idea that they can raise funds at very low cost, and not have to give away equity, even though they don't really have funding needs," said Wang Xianzhen, a CB analyst at Sinolink Securities.
Still, some bankers are optimistic that the Sinopec case will not completely scare investors away from the domestic CB market and impact appetites for upcoming major CB transactions. China Minsheng Banking Corp Ltd , for instance, is looking to raise 20 billion yuan through an A-share CB. (Reporting by Ken Wang and Fiona Lau; Editing by Chris Lewis)
Source:reuters