HKEx raises $500 million from five-year CB

Hong Kong Exchanges and Clearing (HKEx) has raised $500 million from the sale of a five-year convertible bond to help fund its acquisition of the London Metal Exchange (LME).

The base deal size was $400 million with an upsize option of a further $100 million and, due to strong demand, it ended up being fully upsized to achieve the final figure of $500 million, sources said.

At $500 million, it is the biggest overnight CB in Asia-Pacific so far this year, according to Dealogic. The conversion premium is also the highest conversion premium in the region in 2012, according to sources.

HKEx owns and operates the only stock exchange and futures exchange in Hong Kong, as well as their related clearing houses. In June, the company announced a £1.4 billion ($2.2 billion) bid for the LME — an acquisition price that is 181 times more than the LME’s 2011 revenues (of £7.7 million).

It intends to use the proceeds from the CB to help fund the acquisition and pay down bank facilities it entered into on June 15 in relation to the bid, HKEx said in a statement yesterday. The exchange has said it “intends to maintain a prudent debt-to-equity ratio not exceeding 40% to 50%”.

The CB has a five-year maturity with no investor put option. It was offered with a fixed coupon of 0.5% and a yield-to-maturity ranging from 0.5% to 1%. The conversion premium was offered in a range between 30% and 37.5% over Monday’s close of HK$118.90.

With the fixed rate of a 0.5% coupon, the deal resulted in a 1% yield-to-maturity and a 34.57% conversion premium, which is in the upper half of the range. The premium translates into an initial conversion price of HK$160 a share.

Reflecting investor enthusiasm over the transaction, more than 80 investors came into the book, with a wide participation both from outright funds and hedge funds, one source said. They were largely from Europe and Asia.

Scarcity certainly played a role — it is not every day that the Hong Kong exchange enters the market — but there is also a strong desire among investors for quality names, the person noted.

The deal was launched at 9.30pm in Hong Kong and was covered within an hour of launch, leading it to be multiple-times oversubscribed, another source said. The books were closed at 12.30am.

Assuming full conversion of the CB at the initial conversion price of HK$160 a share, the CB will be convertible into about 24.2 million shares, representing about 2.2% of the issued share capital of the company, according to the statement.

The bonds were marketed with a credit spread of 150bp and a stock borrow cost of 50bp. It comes with a conversion price adjustment for all cash dividends but above certain amounts set for each relevant fiscal year. The final terms gave a bond floor of 93.8% and an implied volatility of around 23%.

After the transaction, HKEx’s stock fell 2.6% to HK$115.8 yesterday, taking its year-to-date decline to 3.5%. But it has recouped more than 17% from a low in July. The Hang Seng Index, which was almost unchanged yesterday, has gained 12.3% since the start of the year.

Deutsche Bank, HSBC and UBS were joint global coordinators and bookrunners for the deal.