Franshion copies perpetual deal pioneered by Sino-Ocean

Hong Kong-listed Franshion Properties (China) has raised $500 million from an issue of perpetual subordinated convertible securities that were structured almost exactly like a similar perpetual deal sold by fellow Chinese real estate developer Sino-Ocean Land Holdings in mid-July.

Indeed, sources said the mandate to the arranging banks was to achieve the same accounting treatment as Sino-Ocean did on its $900 million offering, in other words to have the securities treated as equity on the balance sheet from day one. From an accounting perspective, convertible bonds are otherwise treated as debt until conversion. After that they become equity.

For Franshion, which has a market cap of about $2.4 billion, this means a substantial increase in its equity, which in turn will allow it to increase its borrowing.

The deal was in the market on Monday evening (Hong Kong time), at the same time as China Unicom’s record offering (see separate story on our website today), but Franshion chose to complete its deal as a private placement, targeting only selected accounts. According to sources, the buyers were similar in type to those who bought the Sino-Ocean deal; long-only equity funds, private equity investors and corporate family office. In this case, none of the large existing shareholders participated, however. In all, about 20 accounts came into the deal, although a large portion of the offering was said to have been placed with just a few investors.

As most of these investors are of the buy-and-hold type, there was no real trading in the securities yesterday. However, sources said there were a few offers around 105. The share price dropped 3% to HK$2.29.

Like Sino-Ocean, Franshion offered the securities on fixed terms, meaning it was a case of take it or leave it for investors. The coupon was set at 6.8% and the conversion price at HK$2.83, which equalled a conversion premium of about 19.9% versus Monday’s closing price of HK$2.36. The securities are convertible into equity, starting from one year after issue.

Since it is a perpetual deal, there is no put, but an issuer call after five years at 110% of the principal amount, as well as a forced conversion clause that will be triggered if the securities trade 80% above the conversion price for a prolonged period of time.

And like on the Sino-Ocean deal, there is no coupon step-up if the securities aren’t called, meaning there is no real incentive for the issuer to call. A source said this may change over time if more companies decide to issue these types of bonds, but for the time being there is enough demand without the issuer having to agree to increase the coupon if the securities are left in the market for more than five years

The offering came with an upsize option of $100 million, which wasn’t immediately exercised.

BOC International and J.P. Morgan, which were both also on the Sino-Ocean trade, were brought in to arrange the Franshion deal too, while Macquarie was replaced by Deutsche Bank and Standard Chartered.