Taiwan-based Asia Cement last night returned to the market to raise $172.5 million from a convertible bond that was upsized by 38% from the original base deal and priced close to best terms for the issuer. This was Asia Cement’s second equity-linked deal this year following a $375 million exchangeable bond into textile manufacturer Far Eastern New Century in January.
Both bonds were filed with the Taiwan regulators in December last year, but the company chose to sell the exchangeable first to take advantage of strong demand for soft commodities early this year. Since then, there has been a significant rally in Chinese cement stocks and Asia Cement, which has 80% of its production capacity in China, has risen by about 33% since late February. It closed at a three-year high of NT$40.45 on Wednesday, making this a good time for the company to issue shares at a future price — even if a 2.2% drop in the Dow Jones index in the US the night before put a dampener on Asian trading yesterday.
The deal worked, sources said, partly because it was quite small and partly because the issuer wasn’t overly aggressive with regard to the terms — although after pushing the yield and the conversion price close to the tight end, the valuation was definitely not cheap.
The CB has a five-year maturity with a put at year three and was offered with a fixed zero percent coupon, a yield between 0.25% and 0.75% and a conversion premium of 20% to 25% over yesterday’s close of NT$40.30. (The share price fell 0.4% yesterday from Wednesday’s three-year high.)
This compares with a yield ranging from a negative 0.5% to 0% and a conversion premium between 30% and 40% on the January exchangeable. That deal was priced at best terms for investors, resulting in zero yield and a 30% premium.
Last night Asia Cement was, however, able to push the yield to 0.3% and the premium to 24.5%, which gave a conversion price of NT$50.17. The fact that it didn’t opt to take the price right to the end of the ranges would have only a marginal economic benefit for the buyers, but sent a message that the company didn’t want to push the terms beyond what would work in the market.
And it seems it might have got that right as the CB was bid at 101-102 in the grey market after pricing.
The deal was initially launched at a base size of $125 million with an upsize option of $25 million. But with about 140 orders in the book — some of which were said to be pretty chunky — the upsize option was increased to enable a total deal size of $172.5 million. The deal was open for about three hours and ended up being well over-subscribed.
A source estimated that about 60% of the demand came from outright investors and 40% from hedge funds.
As with most Taiwan deals these days, there were plenty of asset swaps in the market to support the trade, but sources said there weren’t a lot of takers as investors are quite comfortable with the credit to the extent that they don’t feel the need to hedge. Asia Cement is viewed as a blue-chip credit and it is well known by CB investors both because of the January deal and because of a previous exchangeable sold three years ago.
The credit spread was assumed at 150bp over Libor, which is in line with where the January exchangeable trades. The stock borrow cost was assumed at 400bp and the deal came with full adjustments for cash dividends.
This gave a bond floor of 93.6% and an implied volatility of about 25%. The latter looked a bit expensive since the 90-day historic volatility is also 25%.
Meanwhile, the conversion price is almost 12% above Asia Cement’s all-time high of NT$44.92 that it reached in May 2008 and above analysts’ average target price for the stock of NT$42.68. Of the 19 analysts who cover the company, according to Bloomberg, 10 have a “buy” rating on it, seven have a “hold”, and two a “sell”.
In spite of the concerns that China’s growth is slowing down and that the real estate sector is overheated, the cement sector is doing well on the back of a belief that the government will continue to construct roads and other infrastructure projects and to build public housing even in a slower growth scenario. And that should result in plenty of demand for cement. There is also a moratorium on the construction of new cement plants in China, which is benefitting the existing operators.
Goldman Sachs estimates that cement prices in China will increase by an average of 20% this year, followed by another 10% increase next year.
The CB was arranged by Goldman Sachs as the sole global coordinator, while Deutsche Bank joined as a bookrunner. Goldman was also a global coordinator for the exchangeable in January although on that trade, the joint bookrunners were Citi and UBS.
