Zero-coupon convertible bonds are becoming a sought-after financing tool for many Chinese companies across a variety of industries. Of the US$34 billion in convertible bonds issued in the Asia-Pacific region year to date, the top five deals by size were all issued by Chinese companies, collectively worth US$10.2 billion, according to data from Dealogic, and all of them were with zero coupon.

In September, China Pacific Insurance issued a HK$15.56 billion ( US$2 billion ) zero-coupon convertible bond due in 2030, which was the first of its kind from a state-owned financial institution with dual listings in mainland China and overseas markets. As well, it is the largest zero-coupon convertible bond ever issued in Hong Kong dollars.

In the same month, the e-commerce giant Alibaba also completed its issuance of a US$3.2 billion zero-coupon convertible bond due in 2032, which is linked to its American depositary shares and will be used to fund its data centre expansion. The company already issued a HK$12 billion zero-coupon convertible bond in July.

As an equity-linked financing product, convertible bonds contain features of both equity and fixed income, which can limit the downside risks while providing upside potential. In addition, the converted shares will not dilute the equity of existing shareholders and will preserve the shareholding structure. Such features offer advantages to issuers, existing shareholders and investors in times of high macroeconomic volatility, as is the case now.

Zero-coupon convertible bonds reduce issuers’ financing costs by eliminating interest payments, while typically carrying higher conversion premiums. Investors who purchase them are generally optimistic about the issuer’s future performance, expecting the stock to rise above the conversion price before maturity.

A number of Chinese companies listed on the Hong Kong Exchange, including Baidu, Ping An Insurance Group and SF Holdings, have turned to the zero-coupon convertible bond as a financing tool this year to raise funds for their capital expenditures internationally.  

A total of 165 convertible bonds amounting to US$34 billion, Dealogic data show, have been issued in the first nine months of this year, which is close to exceeding the 181 issuances valued at US$36.5 billion for all of 2024.