Spiraling Down: Over 19% Plunge, Nearly 100 Bonds Below Par Value

The convertible bond market, once known for its "ability to attack and defend," is facing a new round of deep adjustments.

As of the close on June 25th, Dongshi Convertible Bonds fell by more than 19%, closing at 82.99 yuan per bond, and Guanghui Convertible Bonds dropped by 16.5%, reporting 38.43 yuan per bond, which is less than half of their face value. In addition, the decline of Shanhe Convertible Bonds and Huicheng Convertible Bonds also exceeded 10%.

The recent sharp decline in convertible bonds is not uncommon. As of the 25th, 98 convertible bonds have broken below their face value. According to Choice data, all of the above 98 low-priced convertible bonds have declined in the last five trading days, with over 30% of convertible bonds experiencing a decline of more than 10%.

As the market adjusts, institutional views on the future market have also diverged. Some institutional insiders believe that the risks of low-priced convertible bonds are still ongoing and should be invested in cautiously. Other institutional insiders believe that as convertible bonds continue to decline, their cost-effectiveness has returned, and the time to bottom-fish has arrived.

A liquidity squeeze is brewing.

The storm of the convertible bond market's decline is intensifying, with low-priced convertible bonds becoming the "hard-hit area" of the decline.

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From June 19th to June 24th, the China Securities Convertible Bond Index fell for five consecutive trading days. Although there was a slight rebound yesterday, the decline in the last five days still exceeded 3%. Among them, low-priced convertible bonds have accelerated their decline.

The most severe decline is Guanghui Convertible Bonds, which have fallen sharply for three consecutive trading days. Since June, the cumulative decline has approached 60%. The current latest convertible bond price is only 38.43 yuan per bond, equivalent to 40% of the face value.

Zhongzhuang Convertible 2 fell by 43.26% this month, and the current convertible bond price has retreated to 30.4 yuan per bond, less than one-third of the face value.

Bohui Convertible Bonds and Liyuan Convertible Bonds are also accelerating their decline, falling by 37% and 29% respectively since June. The current latest convertible bond prices are 63.60 yuan and 66.83 yuan, respectively.According to Choice data, as of the close on June 25, out of the 532 convertible bonds being traded, 98 have fallen below their par value of 100 yuan, accounting for approximately 18%.

Many institutions believe that the phenomenon of liquidity squeeze is looming in the convertible bond market. The reporter has noticed that recently, many individual bonds have fallen more than the underlying stocks. According to Choice data, in the past week, among the 98 low-priced convertible bonds, 56 individual bonds have fallen more than the underlying stocks, accounting for 57%.

Some individual bonds that do not involve default concerns have also seen a "break-even" situation. For example, since June 19, without any significant bearish information, Wentai Convertible Bonds have fallen for four consecutive trading days, dropping to 94 yuan per bond on June 24, breaking the par value for the first time.

"The recent sharp decline in low-priced convertible bonds, the speed and extent of this decline should be at a historical level," said Zuo Dayong, the chief fixed income analyst at Xingye Securities. The main reasons are market concerns about small and micro-plate adjustments, credit rating downgrades, buyback pressures, underlying stock delisting risks, and capital stampede, with multiple factors superimposed, leading to indiscriminate selling of low-priced convertible bonds by some funds. Adjustments have led to a clear spread.

"From last Tuesday to Friday, the convertible bond market underwent a significant adjustment, with many individual bonds falling more than the underlying stocks, among which low-priced bonds fell significantly more," Wang Yixi, an analyst at Guoxin Securities, pointed out in a research report. Since last Wednesday, the rate of decline has noticeably increased, and some individual bonds that do not involve default concerns but have a large institutional holding have also seen a "break-even" situation, reflecting that this round of decline has shifted from solely worrying about credit risk to a liquidity squeeze.

Dual risks superimposed

Behind the storm of declines sweeping the convertible bond market, the industry generally believes it is due to the superimposition of dual risks. On the one hand, as the "zero default" history of convertible bonds is broken, the credit risk of the convertible bond market is gradually exposed. On the other hand, with the recent introduction of the new "Nine National Articles," the A-share delisting tide is surging, and many convertible bonds are implicated in the risk of underlying stock delisting, accelerating the decline.

In recent years, the myth of "zero default" for convertible bonds has been successively broken, and the credit risk of convertible bonds has also attracted market attention. Since 2023, Lan Dun Convertible Bonds, Sout Convertible Bonds, and Hongda Convertible Bonds have successively delisted both the underlying stocks and the convertible bonds; in addition, Zhengbang Convertible Bonds and Quanzhu Convertible Bonds have been repaid according to the ordinary creditor settlement plan due to company bankruptcy restructuring. On May 17 this year, Sout announced that due to insufficient liquidity, it could not pay the buyback principal and interest, and Sout Convertible Bonds officially became the first convertible bond with substantial default.

Zhang Xu, the chief fixed income analyst at Everbright Securities, believes that the decline in ultra-low par value convertible bonds is mainly due to the ongoing fermentation of default risk and credit rating downgrade risk for ultra-low par value bonds, leading investors to sell ultra-low par value bonds.

To make matters worse, due to market adjustments for small and micro-plates, some underlying stocks of convertible bonds face delisting risks, causing a large amount of capital to flee from the low-priced convertible bond sector.According to data from Choice, among the 98 low-priced convertible bonds that have broken below par value, three have had their underlying stocks "starred and capped," namely *ST Tianchuang, ST Dongshi, and ST Zhongzhuang. In terms of stock prices, the latest closing prices of the underlying stocks for 75 convertible bonds are less than 10 yuan per share, and for 16 convertible bonds, the latest closing prices are below 3 yuan, getting closer to the "warning line" of 1 yuan face value delisting.

Among them, Guanghui Automobile closed at 0.71 yuan per share on Tuesday, having been below 1 yuan for four consecutive trading days, with the risk of delisting due to face value suddenly increasing. According to Article 9.1.17 of the "Stock Listing Rules," if a listed company's stock is terminated, the convertible corporate bonds and other derivative varieties it has issued should also be terminated. This also means that if Guanghui Automobile is delisted, the corresponding convertible bond, Guanghui Convertible Bond, will also迎来 its final chapter.

Faced with the continuous decline of convertible bonds, some major shareholders have stepped in to help. The latest case of market rescue is Shanying Convertible Bond. The underlying stock of this bond is Shanying International. Over the past month, the stock price of Shanying International has continued to fall, from below 1.8 yuan per share on May 21, down to 1.33 yuan per share on June 21, approaching the 1 yuan warning line. Shanying Convertible Bond also fell, dropping more than 20% in the past month, with the price on June 21 being only 77.81 yuan per piece.

Faced with the "double kill" crisis of stocks and bonds, on June 22, 2024, Shanying International announced that the company received a notice from its controlling shareholder, Fujian Taisheng Industrial Co., Ltd. (hereinafter referred to as "Taisheng Industry"), stating that Taisheng Industry plans to purchase the Shanying Convertible Bonds circulating in the secondary market at a price not higher than the face value per piece until maturity, with an estimated total fund usage of not less than 200 million yuan. On the evening of June 23, Shanying International disclosed another announcement stating that the company plans to repurchase its shares through the Shanghai Stock Exchange's stock trading system through a centralized bidding transaction method, with a total repurchase fund of not less than 350 million yuan and not more than 700 million yuan. After the large-scale repurchase and the increase in convertible bonds by the controlling shareholder, Shanying Convertible Bond has risen for two consecutive days, and the current bond price has returned to above 90 yuan per piece.

Are there still investment opportunities in the future?

As the convertible bond market fluctuates significantly, many institutions that were heavily invested earlier have suffered heavy losses.

Taking Guanghui Convertible Bond as an example, as a former star product, many well-known institutions have invested heavily in it before. As of the end of last year, several institutional investors held a total of 7.7 million pieces of Guanghui Convertible Bond, accounting for 23% of the issuance ratio. Looking at the current decline of Guanghui Convertible Bond, if the holding cost of the aforementioned institutional investors is the issuance face value of 100 yuan for convertible bonds, and the current price of convertible bonds is 38 yuan, then the institutional investors have a floating loss of about 477 million yuan.

However, there is still some divergence in the industry's views on the investment opportunities for convertible bonds in the future.

"In the future, ultra-low par value convertible bonds will still be affected by credit risk, and this impact will also expand to low-quality convertible bonds that will mature within one year." Zhang Xu suggests that investors should not rush to layout ultra-low par value and low par value convertible bonds, and they still need to pay attention to credit risk. In addition, it is also necessary to pay attention to the capital flow in the convertible bond market, especially the allocation choices of "fixed income +" funds and insurance funds for convertible bond assets and pure bond assets.

Some institutions are more optimistic. Wang Yixi believes that historically, although the fermentation of Yongmei credit risk at the beginning of 2021 also led to a liquidity squeeze in convertible bonds, there was also the example of Sout退市 on May 12 last year, but looking at the subsequent situation, the premium rate of convertible bonds was quickly repaired within a few trading days.In his view, considering the broader context of asset scarcity, there has been a noticeable inflow of convertible bond funds since May, and the market is not short of funds looking to bottom-fish. The liquidity shock in this round is expected to be quickly alleviated. The significant drop in this round has also brought the cost-effectiveness of convertible bonds back into line.

After the recent sharp decline in low-priced convertible bonds, some private equity funds have begun to enter the market to "bottom-fish" for some convertible bonds that exhibit high-yield characteristics. For instance, on June 21, Emperor Home Group Co., Ltd. announced that GaoYing Assets, through its independently issued and managed private securities investment fund, purchased Emperor convertible bonds through competitive trading on the Shenzhen Stock Exchange. As of the close on June 19, 2024, they held a total of 3.1 million Emperor convertible bonds, accounting for 20.67% of the company's total convertible bond issuance for this round. Emperor convertible bonds had just experienced a continuous decline in the past month; on May 17, the price of the convertible bond was 77.9 yuan per bond, and by June 21, the price had fallen to 53.5 yuan per bond.