China’s electric vehicle maker NIO Inc., among rivals to Elon Musk’s Tesla, launched a convertible bond worth $650 million on Wednesday, nearly four months after it listed in New York, according to Reuters’ news.
The company’s move to raise capital through an equity-link bond is equivalent to that of iQiyi, China’s Netflix-like video streaming platform which sold a convertible bond valued $750 million in November last year. Reuters reported that it highlights the rising appeal for convertibles for major companies in need of cash.
Convertible bonds are a relatively cheap funding avenue because of their lower coupons in exchange for providing option for the bondholder to convert the debt into shares of a company at a set price in future. Investors get fixed returns from the equity link which gives prospects of profiting from a rise in share price of the issuer.
According to a term sheet seen by Reuters, the electric carmaker was marketing a five-year convertible bonds with a conversion premium of between 27.5% and 32.5%.
NIO could raise up to $750 million if an over-allotment option or ‘greenshoe’ was exercised.
Shares of NIO on Tuesday closed at $6.94, 16 percent above since it started trading in September last year.
Convertible bonds are gaining increasing momentum in Asia, hitting the highest volume in 2018 with $35.5 billion raised, since the financial crisis, according to Refinitiv Data.
Further, their appeal is increasing at a time when interest rates are rising, boosting borrowing costs when companies in Asia face nearly $500 billion to mature dollar-denominated bonds over the next two years.
The convertible bonds also represent an alternative for cheaper funding compared to straight debt for startups and tech companies which are often unrated and can have more volatile stock prices.
China is the world’s largest and fastest-growing market for new-energy vehicles (NEVs) that comprise plug-in electric hybrids and electric battery cars. However, the competition is fierce as the country looks to rein in subsidies that resulted in a range of electric vehicle contenders entering the market.
NIO’s revenue as well as deliveries rose in the third quarter of 2018. Currently, it is planning to use the convertible bond proceeds for R&D including the development of manufacturing facilities along with sales and marketing.
Joint book-running managers for the new deal include UBS, Credit Suisse, Morgan Stanley, Goldman Sachs, Deutsche Bank, Citigroup, JPMorgan, and Bank of America Merrill Lynch.