After more than a month with no new convertible bond issues in Asia and no Chinese issuers at all year-to-date, two Hong Kong-listed Chinese firms chose to hit the market last night. First out was 361 Degrees International, a designer, manufacturer and retailer of branded mass-market sportswear, which raised $150 million from an upsized offering that met with strong demand.
It was followed later in the evening by a Hong Kong dollar-denominated transaction from Chinese property developer China Overseas Grand Oceans Group that was offering HK$2 billion ($258 million) worth of CBs with a HK$300 million upsize option.
The offering from 361 Degrees took the market somewhat by surprise as it came on the back of a disappointing 12-month earnings release on Monday, which triggered a sharp sell-off in the stock. Also, investors were anticipating potential issuance from the Chinese real estate sector as several of the country’s Hong Kong-listed developers are reporting 2011 earnings this week, while CBs from the Chinese retail sector are something of a rarity.
However, the offering, which was arranged by Bank of America Merrill Lynch, was well-received as investors liked the high coupon of up to 4.5%. The bookrunners also entered into a stock lending agreement with the company’s major shareholders to provide enough stock borrow to cover the entire delta, offering the CB buyers an opportunity to hedge the equity option.
In all, about 60 to 70 investors participated in the transaction and according to a source the deal was more than three times covered even before the order books closed. This allowed the upsize option to be exercised in full and the deal to be increased to $150 million from the initial $125 million. The conversion premium was also pushed slightly above the bottom of the range.
The CB has a five-year maturity, but can be put back to the issuer after three years. It was offered with a coupon and yield ranging from 4% to 4.5% and a conversion premium of between 27% and 30% over yesterday’s closing price of HK$2.99. The latter seemed high at first glance, but after taking into account the 8% drop in the share price over the past couple of sessions it suddenly looked a lot less aggressive.
The stock is also off 37% from its most recent peak in early September and down 47% from its 2011 high of HK$5.69 that it hit in mid-May as the industry struggles with an inventory problem.
The premium was fixed at 27.4%, which gives an initial conversion price of about HK$3.809 – a price that 361 Degrees traded at as recently as November. The coupon and yield were fixed at the investor-friendly end at 4.5%. There is an issuer call after three years, subject to a 130% hurdle.
As an indication of the interest, sources said the CB kept above par in the grey market during marketing and shortly before the books closed it was quoted at 100.5/101.5. One source said the buyers of the deal included both outright accounts and traditional CB arbitrage funds, but didn’t specify further.
The deal was marketed at a credit spread of 650bp, which was based on the issuer’s domestic debt. The CB holders will get compensated for all cash dividends, which is important since the company is paying high dividends, relatively speaking. It is currently trading at a trailing dividend yield of 9% based on its 2011 earnings and a forward yield of about 8%, according to analysts.
A 1% stock borrow cost was used in the valuation models, although investors were offered the stock borrow as a package at the market price so this may not necessarily have been the price they paid.
At the final terms this gave a bond floor of about 93% and an implied volatility of 14%.
The China Overseas Grand Oceans CB also had a five-put-three structure. It was offered with a coupon between 2% and 3%, although there will be no coupon payments in years four and five, and a conversion premium between 20% and 30% over yesterday’s close of HK$9.64. The CB can only be converted into equity after the second anniversary, which according to a source is a first for a CB where the stock isn’t hedgable.
Notably the bonds come with a three-year standby letter of credit from DBS, which essentially means that the issuer is borrowing DBS’s investment grade rating to get a better pricing on the deal. The bookrunners were said to be marketing the deal at a credit spread of 150bp over Hong Kong dollar swaps. DBS is rated AA- by Standard & Poor’s and Fitch and Aa1 by Moody’s.
DBS was also a joint bookrunner for the CB together with BOC International.
China Overseas Grand is a subsidiary of China Overseas Land and Investment (COLI), which is one of the largest property developers in China. COLI is ultimately owned by China State Construction Engineering Corp, one of the world’s largest construction contractors and a core enterprise under the direct supervision of China’s State-owned Assets Supervision and Administration Commission (Sasac).
While this deal didn’t hit the market until 361 Degrees had already been bookbuilding for about two hours, the bookrunners were said to have wall-crossed a number of convertible bond investors before launch that were brought in as anchor investors. This gave it strong momentum from the start and the order book was said to have been covered after just 20 minutes.
The final pricing was expected early this morning.
