Tsinlien Group, a holding company wholly owned by the Tianjin municipal government, last night sold Rmb1.311 billion ($200 million) worth of five-year bonds exchangeable into its Hong Kong-listed infrastructure and utility unit Tianjin Development Holdings.
The renminbi-denominated and US dollar-settled deal was well received by the market, which allowed J.P. Morgan as the sole bookrunner to push the conversion premium to 32% -- the highest level achieved by a convertible or exchangeable bond so far this year. Essar Energy, Epistar and Asia Cement’s exchangeable into Far Eastern New Century all priced with a 30% premium, while the other four international deals in the market since the beginning of this year have all had premiums below 25%.
Aside from the fact that investors and analysts remain positive on China’s infrastructure sector, investors also like credits that are 100% government-owned as it gives them comfort that the coupons will be paid and that they will get their money back, in case they won’t be able to convert the bonds into equity. According to a source, investors tend to be more aggressive about getting a share of such deals. Tsinlien’s stake in Tianjin Development will fall to 37.5% from about 54% if the bonds are fully converted, although the issuer does have the option to settle in cash. To give investors additional comfort, the bonds have a change of control put option that will kick in of the local government’s stake in Tsinlien falls below 100% or if it ceases to hold a controlling stake in Tianjin Development.
Their appetite was also whetted because of the limited volume of Asian CBs issued this year. Including Essar Energy, which was issued out of London and went mostly to European accounts, and New York-listed ReneSola, which was structured as a US CB, there have been seven deals year-to-date, raising a combined $2 billion. This is also the first renminbi-denominated CB to hit the market in 2011.
Indeed, despite the high premium and the fact that the coupon was fixed below the top end, investors continued to chase the deal outside the primary offering. The bonds traded at 102 in the grey market during the bookbuild and after pricing, in the early hours of the Hong Kong morning, they had edged up to 103.5.
Tsinlien, through a special purpose vehicle by the name of Bright North, offered a coupon and yield between 1% and 1.5%, while the conversion premium was indicated between 25% and 35% over yesterday’s closing price of HK$6.69. As noted the premium was fixed at 32% for an initial conversion price of HK$8.83, while the coupon was set at 1.25%. The bonds are issued and redeemed at par, making the yield identical to the coupon.
As a trade-off for the pricing, the issuer didn’t immediately exercise the Rmb327 million ($50 million) upsize option, even though the deal was said to have been multiple times covered.
The bonds have a five-year maturity, but can be put back to the issuer on the third anniversary at par. They also come with an issuer call after three years, subject to a 130% hurdle. They can be exchanged into shares of Tianjin Development at any time after the first 12 months.
The deal attracted close to 100 investors across both outright accounts and hedge funds, including many of the usual CB buyers in Asia. Given the high subscription ratio, however, a lot of orders were given no bonds at all. This would have helped support the deal in the aftermarket.
The backing by the Tianjin municipal government allowed the bookrunner to market the credit at a fairly tight credit spread of 300bp. The stock borrow cost was assumed at 5% -- Tianjin is quite illiquid with only about $1.5 million worth of shares traded on an average day – and bondholders will be compensated in full for dividend payments.
This gave a bond floor of 95% and an implied volatility of 27%, which compares with a historic volatility in the mid-30s.
Tianjin Development’s share price has traded in a range between HK$6.50 and HK$7.50 this year after gaining strongly from a 2010 low of HK$4 in late May and from less than $2 in November 2009.
Tsinlien said it will use the proceeds for general corporate purposes, including potential acquisitions.
