Yahoo Finance Banks Said to Urge Hong Kong to Be More Flexible on Convertible Bonds and Stock Buybacks
(Bloomberg) -- Major investment banks are asking Hong Kong’s stock exchange to allow companies with a primary listing in the city to do share buybacks and convertible bond sales simultaneously, people familiar with the matter said.
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The request follows a flurry of high-profile issuances by Chinese technology companies including Alibaba Group Holding Ltd., JD.com and Trip.com, which raised billions of dollars in convertible bond sales and used some of the proceeds to repurchase their American depositary receipts. They could do that as their main listings are in the US. In Hong Kong it wouldn’t be possible.
Hong Kong requires Extraordinary General Meeting approval for the kind of share buybacks that trio of tech companies did with the convertible bond proceeds, making it impossible to do such deals overnight, the people said.
Banks and law firms have met with Hong Kong Exchanges & Clearing Ltd., the people said, asking not to be identified as the talks aren’t public.
A representative for HKEX said the company cannot comment on any ongoing discussions, but it is always looking for ways to enhance competitiveness and efficiency of markets for issuers and investors.
The discussions come as authorities try to breathe life into Hong Kong’s listless financial markets, where major deals have largely dried up. The recent convertible bond offerings by the Chinese tech firms have at least been a rare bright spot for business — and fees — at the big investment banks.
Alibaba’s convertible bond sale last month was a record dollar-denominated issuance by an Asian company. The tech giant said at the time it would use part of the $4.5 billion proceeds to repurchase 14.8 million ADRs, as well as to fund future buybacks.
The strategy enables companies to repurchase a large chunk of shares in one go, while minimizing the dilution that can occur if buyers of its bonds decide to convert them into shares. The concurrent repurchase also helps investors who are seeking to buy the convertible debt and sell the stock as a hedge against it.
While US-traded Chinese tech firms have resorted to the instruments, many subsequently listed in Hong Kong and converted their listing status to dual primary, meaning they’d be unable to sell convertible bonds and buy back shares with the proceeds.
Convertible arbitrage funds are the main target investor group for these placements, which are an inexpensive funding option for the large share buybacks carried out by Alibaba, JD.com and Trip.com, Bloomberg Intelligence analysts Cecilia Chan and Timothy Tan wrote in a June 11 note.
High dollar yields and volatility, combined with low equity valuations, may encourage more Asian issuers to consider convertible bonds as a funding source, the BI analysts wrote, suggesting that Meituan could be next in line given the decline in the online shopping platform’s equity value.
--With assistance from Kiuyan Wong.
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