The Deutsche Bank-led issue saw healthy demand even though the share price has more than doubled from the S$0.62 initial public offering price, which allowed the $22 million upsize option to be exercised immediately. At the final $150 million size, the bond issue accounted for about 16% of the company and was twice the size of the earlier IPO.
According to a source, more than 60 investors participated in the deal which was offered with a fixed conversion premium of 45% above yesterdayÆs close of S$1.38.
The premium was the widest achieved by a Singapore-listed issuer this year, ahead of the 42.8% achieved by CapitaLand on its $221 million Singapore-dollar denominated CB in October, which had a 10-year maturity with a seven-year put. China MilkÆs bonds have a shorter (and more common) five-year maturity, three-year put structure which in theory should make it harder to hit the conversion price, although the recently listed company is obviously in a different growth stage than well-established property developer CapitaLand.
China Milk posted a 63% gain in net income for the six months to September to Rmb190.3 million ($24 million) on the back of 55% revenue growth.
The company, which is ChinaÆs largest cattle breeding company, will be able to call the bonds after three years, subject to a 130% hurdle, to help force conversion once the share price climbs above the conversion price.
The bonds were issued at par and offered to investors with a yield range of 4.75% to 5.75% before being priced right in the middle at 5.25%.
The underlying assumptions included a credit spread of 225 basis points above US Libor, which was said to have been supported by a credit bid provided by Deutsche Bank. There is a divided protection that will kick in above 1% and while it is possible to go short on the stock, the stock borrow cost was still assumed at 5% because of the limited borrow available.
The final price gave a bond floor of 94.6% and an implied volatility between 30% and 31%. Partly due to the sharp gains since listing, the 100-day volatility is a hefty 43% and for valuation purposes, a capped volatility rate of 34% was used.
According to a term sheet sent to potential investors, the money raised will be used to buy more cattle, to expand and acquire new production facilities, to buy new equipment and machinery and to otherwise expand the business of the issuer and its subsidiaries.
The cash it pocketed from its S$115 million ($75 million) IPO nine months ago went primarily towards the construction of a milk production factory that will have a capacity of 150,000 tonnes of yoghurt, cheeses and flavoured milk. This downstream facility, the first phase of which will become operational towards the end of this year, will complement the groupÆs core business which consists of production of bull semen, dairy cow embryos and raw milk that it sells to dairies.
Both sides of its business is tapping into a growing demand for fresh milk in China, which goes hand-in-hand with the increasing wealth among the middle class and a desire for a healthier lifestyle.
The company is based in ChinaÆs Heilongjiang Province, which is one the worldÆs top three regions for breeding dairy cows. It currently has nine farms and about 15,000 head of dairy cattle, including ChinaÆs largest herd of Canadian Holsteins which is one of the most productive breeds of dairy cow. China Milk is planning to increase its herd of cattle to 20,000 head by the end of the current fiscal year in March 2007.
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