Lehman eyes India, China for growth in convertible bonds

Lehman Brothers Holdings Inc, the fourth-largest arranger for equity-linked sales in Asia, expects India and China to be the fastest-growing markets for convertible bond sales in the region.

"India is a new market for us, where fees for arranging convertible bond sales are still kept at a reasonable level,'' said Joonkee Hong, the firm's Hong Kong-based head of global finance for the Asia-Pacific region.

Investment banks earn a fee of between 2 to 2.5 per cent managing equity-linked debt sales for companies in India, while in South Korea and Taiwan, fees have fallen to 0.5 per cent due to competition from local securities firms, Hong said in a media briefing yesterday.

Companies in the Asia-Pacific region, including China Petroleum & Chemical Corp, Asia's biggest refiner, and Hotel Leelaventure Ltd, India's third-biggest hotel company, raised $5.9 billion selling convertible bonds this month, 67 per cent more than the same period of last year, Bloomberg data show.

The market for convertible bonds in the region could reach a record $28 billion this year, according to a forecast by New York-based Lehman.

Bumpy Phase
"We're seeing a pickup in not just the region, pretty much globally in the past 12 months, as stock markets enter into a bumpy phase,'' said New York-based Larry Wieseneck, global head of the bank's global finance group. "What drives the growth of issuance is the fact that investors now perceive more volatility in the markets.''

The Morgan Stanley Capital International Emerging Markets Index tumbled 10 per cent in the five days ended March 5.

The sell-off, triggered by a plunge in Chinese equities and disappointing US economic data, wiped more than $3.3 trillion from stock market values worldwide.

Investors withdrew a record $8.9 billion from emerging-market equity funds in early March, according to Cambridge, Massachusetts-based Emerging Portfolio Fund Research Inc.

Convertible debt offers investors the security of bonds and the option to benefit from rising stock prices.

JPMorgan Chase & Co, Goldman Sachs Group Inc and Morgan Stanley are the top three equity-linked debt arrangers this year in the Asia-Pacific region where the market has reached $13.2 billion, according to data compiled by Bloomberg.

Companies in China sold $3 billion of such debt this year, more than five times the $548 million recorded for the same period of 2006. The market in India is at $2.6 billion, Bloomberg data show.

In 2006, banks worldwide earned an estimated 36 per cent of their fees from high-yield debt and leveraged finance loans businesses, 25 per cent from equity, 26 per cent from merger and acquisition advisory and 13 per cent from arranging investment-grade debt, Wieseneck said in Hong Kong yesterday.

The Asia-Pacific region accounted for 12 per cent of the fee pool last year, compared with 54 per cent for the US and 34 per cent for Europe, Wieseneck said.