(Bloomberg) -- WuXi AppTec Co.’s shares had their worst day in seven months, after the company sold a $500 million convertible bond the day before a stark shift in risk appetite for Chinese stocks.
The shares fell 17% Tuesday in Hong Kong as the drag on its price from potential dilution was compounded by a widespread selloff in the city’s equity market. The Hang Seng Index fell as much as 10% after a widely anticipated briefing by China’s top economic planning body disappointed investors.
WuXi AppTec, a Shanghai-based company, sold a zero-coupon bond due in 2025, which investors can choose to convert into stock if the company’s shares rally from their current price. The initial conversion price for the bonds is HK$80.02 a share, representing a 16% premium to the stock’s closing price on Monday, according to a statement to the Hong Kong stock exchange on Tuesday.
The deal made WuXi AppTec the latest in a line of Chinese companies that have turned to the convertible bond market for funding, following e-commerce giant Alibaba Group Holding Ltd.’s record-breaking $5 billion convertible bond in May and Ping An Insurance (Group) Co.’s $3.5 billion deal in July. Because convertible bonds give investors an option to buy shares in the future, they can pay much lower yields than conventional bonds, making them an attractive source of funding for companies.
Volumes for dollar-denominated convertible bonds issued by Chinese companies have hit a record in 2024, rising above $13 billion, according to data compiled by Bloomberg.
A gauge of Chinese shares in the city slumped in its biggest one-day decline since 2008, and an early rally in onshore Chinese stocks on their return from the Golden Week holiday cooled as traders questioned Beijing’s resolve to add more stimulus.
WuXi AppTec said it plans to use proceeds from the sale for global expansion, refinancing debt and general corporate purposes. The deal allows it to reduce its interest burden compared to loans, and avoid immediate dilution compared to a sale of shares, said Jialin Zhang, head of China healthcare research at Nomura Holdings Inc.
The company is seeking funds at a time when US lawmakers are pushing global pharmaceutical companies to sever ties with the drug-research and contract-manufacturing firm. The US House of Representatives last month passed the so-called Biosecure Act that would blacklist Chinese biotech companies and their US subsidiaries from accessing federally funded contracts.
WuXi AppTec’s Hong Kong-listed stock had surged since late September, when a bout of stimulus measures from Chinese officials fueled a breakneck rally in stocks. WuXi joined other companies and shareholders that took advantage of the rare window to raise cash.
WuXi AppTec’s Shanghai-listed shares rose 10% after trading resumed following a week-long holiday, as stock prices in mainland China caught up with those offshore.
Order books for the convertible bond had been covered before the deal launched, thanks to a process known as “wall crossing,” in which investors take a formal pledge not to act on inside information, people familiar with the matter said. The books were about six times oversubscribed after the launch, the people said, asking not to be identified to discuss private information.
The company said the deal’s arranger may concurrently facilitate a so-called delta placement, which is a way to hedge market risk involving covered short sales. Convertible-bond buyers that participated in the delta placement made up about half the order book, a person familiar with the matter said.
The company didn’t immediately respond to a request for comment.
Citigroup Inc. is the sole global coordinator of the deal.
--With assistance from Amber Tong.
(Updates throughout, with additional details on share prices, convertible-bond volumes, subscription levels, delta placement, as well as an analyst comment)
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