A rare mega deal by a Chinese airline is set to revive the country’s convertible bond market, after volatile trading dried up issuance of the popular securities.
China Southern Airlines Co opened subscriptions for 16 billion yuan ($2.4 billion) of its convertible bonds, the largest deal for a non-financial firm since China Petroleum & Chemical Corp sold 23 billion yuan of the notes in early 2011, according to data compiled by Bloomberg. The sale, which is also the biggest in a year and a record for the airline sector in China, comes after just eight deals were priced in September, the least since May.
Carriers around the world have struggled to stay afloat after the pandemic forced governments to shut borders and paralysed air travel. In China, a recovery in demand for domestic flights has helped improve sentiment towards the sector, with more than 13 million passengers travelling during the key October holiday. China’s biggest three airlines probably turned profitable in the third quarter, analysts at HSBC Holdings Plc predicted.
Still, those airlines posted combined losses of almost
$4 billion in the first half and the recovery won’t be enough to put them into the black by year-end.
Liquidity is a key component for professional investors looking to buy convertible bonds — the larger the deal, the more liquid the notes will be when they start trading.
The sheer size of China Southern’s sale also means subscribers will get more of the bonds in their allocations. The carrier, an issuer with the highest possible credit rating, could see its notes rise as much as 18% on debut, according to analysts at Industrial Securities Co.
“I will certainly subscribe,” said Manran Ma, general manager at Beijing Mamanran Asset Management Ltd.
China Southern said in an exchange filing that it will use some of the proceeds to buy aircraft and aviation material, as well as to replenish capital. The firm also plans to sell as much as 10 billion yuan in short-term bonds.
For the six-year convertible issue, the carrier set the conversion price at 6.24 yuan a share, according to the filing, or nearly 4% higher than last week’s close.