Chinese rolling stock manufacturer CRRC Corporation executed a maiden $600 million H-share convertible bond overnight on Monday, the second deal from the sector in the space of a week.
The deal by the world's largest rolling stock manufacturer closely followed a similar $500 million offering by the world's second largest engineering and construction company China Railway Construction Corp (CRCC).
CRRC’s transaction also had an almost identical structure to CRCC. Both carry zero-coupons and zero-yields, with a five-year tenor and three-year put option.
The main difference centred on the conversion premium. CRCC marketed its deal with a 37.5% to 42.5% premium, while CRRC opted for a slightly wider range of 35% to 42.5% to the stock’s three-day volume weighted average (VWAP) of HK$7.1481.
Final pricing was fixed at the bottom end, equating to a conversion price of HK$9.65. Market participants suggested CRRC needed a slightly wider range since it is unrated, whereas CRCC has an A3/A- rating.
The decision to use a VWAP was based on the underlying stock's volatility. Had the deal been priced off Monday’s HK$7.3 close, the conversion premium would have been 32.2%.
Underlying assumptions comprised a credit spread of 150bp to 175bp and stock borrow at 1.5%. That equated to a bond floor around the 91% level and implied volatility of roughly 30%. This was in line with CRCC’s valuation last week.
The new bond has an upsize option of $200 million exercisable within 30 days from the closing date, which is expected to be around March 5th.
Investors’ reception to CRRC was nearly identical to CRCC, with the order book closing two times covered according to one source close to the deal. About 50 investors participated.
According to one broker's prices, the bond traded down 50bp early on Tuesday then widened further to 98.45%/99.45% at the end of the Asian trading day. Sales desks said trading in CRCC, by contrast, was fairly light with the bonds closing at 99.25%/99.625%.
Proceeds from CRRC’s bond sale will be deployed for production and operational projects as well as a capital injection to subsidiaries.
CRRC was created as a result of a state-directed merger between China CSR Corp and China CNR Corp, Shares in the new entity surged to an all-time high of nearly HK$20 last April on expectations the merger would facilitate global domination.
However, the stock plunged shortly after the merger was officially completed at the beginning of June 2015. It closed Tuesday at HK$6.78, down 65% from its all-time high and down 7.12% on the day.
The stock underperformed the Hang Seng China Enterprises Index, which fell 3.4% on Tuesday.
JP Morgan, UBS and CICC were joint global coordinators and lead bookrunners on CRRC’s convertible bond sale, while Bank of America Merrill Lynch, Deutsche Bank, HSBC and CMB International were joint bookrunners.
