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As the Chinese stock market continues to strengthen, nearly 72% of the convertible bonds delisted this year were forcibly converted due to high share prices.
Out of 71 convertible bonds that were delisted from the mainland market so far this year, 51 were forced conversions, according to recent data. The remaining 20 were delisted either because they reached maturity or because the underlying stocks were delisted.
The most recent companies to announce mandatory conversions were Qilu Bank, Zhuzhou Feilu High-Tech Materials, and Zhangjiagang Guangda Special Material.
In China’s mainland market, a mandatory conversion is triggered when the closing price of a convertible bond’s underlying stock exceeds 130% of its conversion price for at least 15 trading days within a consecutive 30-day period. When this occurs, investors are required to convert their bonds at the agreed-upon ratio.
The primary factor behind the increase in mandatory bond conversions is the rise in Chinese stock prices this year. As of yesterday, the average year-to-date increase across stocks listed in mainland China was 26%, according to Wind data.
This year, fewer than 30 convertible bonds have been issued. Coupled with the accelerated rate of mandatory conversions, this has led to an imbalance in the convertible bond market.
Investor demand for these bonds has grown, but supply has diminished, creating a shortage of large-scale, high-quality options for institutional investors, one fixed-income analyst explained. As a result, acquiring such assets has become increasingly difficult for institutions.
This supply-demand mismatch has directly contributed to higher valuations of the remaining convertible bonds on the market, keeping overall market value at relatively elevated levels, the analyst added.
The shortage of new convertible bond issuances is expected to intensify in the second half of the year, further complicating investment opportunities in this sector, the analyst predicted.
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