Desperate times call for desperate measures.
For China Hongqiao Group that meant turning to the equity market with a HK$6.2 billion ($800 million) top-up placement to raise capital ahead of looming debt repayment deadlines in the months ahead. It may not be the last time it seeks support from equity investors.
Hongqiao is well known in the fixed-income market as a frequent issuer of debt, but has rarely raised public equity before. So it came as a shock when the company made a dramatic turn to the equity market on Monday with the biggest equity deal in Asia of the year so far.
More shocking still was the fact Hongqiao launched a chunky deal to sell 650 million shares, which equated to more than 60 times its three-month average daily trading volume and over 8% of its existing share capital.
The fact is the Shandong-based aluminum maker had to resort to an equity raise because it is running out of money and has bond repayments due April and May this year. The company will need $2.4 billion for debt repayment but had only $1.6 billion of cash as of its latest financial statement.
By May the company will need to settle a Rmb12 billion ($1.85 billion) domestic bond issued by its subsidiary Shandong Hongqiao New Material, a Rmb1.5 billion debt under Weiqiao Aluminium & Power, and another $300 million, 6.875% US dollar bond issued by the company itself.
Even after Monday's share placement, the company will likely need to raise further equity since its coffers will be nearly empty after repaying its debts. Public investors were clearly aware of such overhang and had therefore subscribed to only a small portion of the share placement.
Instead, the deal was largely supported by a number of anchor investors, according to a source familiar with the situation. There were as many as 40 accounts in the order book, but allocations were heavily skewed to the top five buyers which took about 90% of the shares.
The heavy anchor support allowed Hongqiao to market the deal at a fixed price of HK$9.6 per share, which represented a 10.45% discount to its closing price last Friday. Hongqiao suspended trading of its shares on Monday to execute the placement.
UBS, CMB International and CLSA were joint bookrunners of the share placement.
Hongqiao has agreed not to sell further shares over the next 90 days.
What next?
Hongqiao’s depleted balance sheet was a consequence of its aggressive expansion since 2014, a bold bet on an industry that has suffered from overcapacity for years. However, Hongqiao believed its strategy was justified as it tipped the non-ferrous metal market to recover over time.
The company’s heavily debt-funded expansion has seen it overtake the likes of UC Rusal and Rio Tinto to become the world’s largest aluminum maker by production output. In 2016 Hongqiao produced 5.83 million metric tonnes of primary aluminum, far ahead of UC Rusal’s 3.74 million and Rio Tinto at 3.54 million, according to their respective financial statements.
But the capacity expansion was disrupted last year – due in part to short selling attacks. In February, independent research house Emerson Analytics claimed Hongqiao had understated its operational costs by as much as $3.1 billion over the years, and exaggerated its profits by more than 50%.
Shares in Hongqiao were suspended for over six months between March 22 and October 30 last year.
The company was further struck by credit rating downgrades from both Standard and Poor’s and Fitch last year, citing weak corporate governance and internal control. It is now rated B by S&P and B+ by Fitch, both in junk territory and a few notches below investment grade.
On a more positive note, most of Hongqiao’s outstanding debt matures between 2021 and 2022, suggesting it will have about two and a half years to restructure its debt and strengthen its balance sheet after the repayments in April and May.
