China Minsheng Banking Corp received massive demand for its Rmb20 billion ($3.2 billion) A-share convertible bond that was in the market last Friday — more than two years after it was first flagged.
Existing A-share holders, who had a pre-emptive right to subscribe to about 99.5% of the issue in proportion to their stake in the bank, took up about 71% and the remaining portion was more than 200 times covered — potentially even more than 250 times covered, according to a source.
The total subscription amount exceeded $200 billion, which is the highest ever for an A-share CB. And since investors have to pay 20% up-front when they submit their orders, the subscription ratio does actually mean something.
The strong demand was no doubt underpinned by the attractive terms, which were fixed and announced two days before the start of the one-day bookbuilding. Notably, the share price kept edging higher after that announcement, which meant the bonds got relative more attractive during the marketing period.
But the enthusiasm for the deal may also reflect a lack of new A-share paper. The Chinese regulators have held off on approving any A-share IPOs for the past six months and follow-on issues have also been far and few between. Indeed, the $200 billion of demand for this particular deal does raise the question of whether the decision not to approve new share issues as a means to help prop up the secondary market has the desired effect.
Minsheng Bank, a private-sector lender that is listed both in Shanghai and Hong Kong, is also seen as a key beneficiary of a pickup in China’s economic growth because of its high exposure to small and medium-sized enterprises.
Its A-share price has gained 60% since the beginning of December last year, although yesterday’s close of Rmb10.05 is below the five-year high of Rmb11.71 from early February.
The six-year CB was issued at par and came with a conversion price of Rmb10.23, which was equal to the average trading price for the 20 days ending last Tuesday, just before the announcement of the terms. The conversion price translated into a 5% premium to last Tuesday’s close of Rmb9.74. This is very low compared to international CBs, but normal for A-share CBs, which tend to be very equity-like. Consequently, they are typically bought on the basis of the equity outlook.
Since the share price has edged higher every day since the terms were announced, the conversion premium has now shrunk to no more than 1.8%.
If the A-shares are trading below 80% of the CB conversion price for more than 15 out of 30 days, the issuer can also propose to lower the conversion price. However, such a reset will require approval from shareholders, as it will have a dilutive effect on the existing shares. The revised conversion price will be set on the same basis as the initial one, ie it cannot be below the 20-day average trading price leading up to the shareholders’ meeting or the latest closing price, whichever is lower. It also cannot be below the latest audited net asset value per share.
The CB is convertible into A-shares at any time starting six months after the issue date. The issuer can also call the bonds at par at any time, subject to a 130% hurdle.
As is typical for A-share CBs, the bonds have a step-up coupon. In the first three years the annual interest will be 0.6%, and in the following three years the bonds will pay 1.5% per annum.
Given the low conversion premium, the bonds are likely to be converted into shares, but if they are not, Minsheng will pay a 6% kicker when redeeming the bonds after six years.
In addition to the pre-emptive rights for existing shareholders, the CB was offered in two separate tranches. Tranche A targeted institutional investors through an offline bookbuilding process, required a minimum order size of Rmb500 million and imposed a one-month lock-up on the buyers; while Tranche B was done online and split into an institutional and a retail portion. The institutional portion of Tranche B had a minimum order size of Rmb100 million and no lock-up.
The decision to split the institutional demand into two pools was intended to help skew the allocation towards large investors. The initial split between Tranche A and Tranche B was 50-50, while Tranche B was split 50-50 between institutional and retail investors. However, this was subject to change depending on the final demand.
As of yesterday there was no information about the allocation between the tranches, although sources said there will be some claw-back from Tranche B to Tranche A and the great majority of the CB will end up with institutional investors.
Minsheng Bank first announced the plan to issue up to Rmb20 billion of A-share CBs in February 2011. At the same time it also said it intended to issue up to 1.65 billion new H-shares, which would represent 40% of its existing share capital.
Shareholders approved the plan in May the same year, but the regulatory approval was harder to come by and the final go-ahead from the China Securities Regulatory Commission didn’t come through until February 7 this year.
However, it did get approval to issue new H-shares in February 2012 and ended up completing that part of the capital-raising plan at the end of March last year. The bank sold the maximum number of shares that it had approval for, raising HK$11.2 billion ($1.44 billion). The shares were priced above the mid-point of the indicated range at HK$6.79 for a 5% discount versus the latest close at the time.
The H-share price has gained 50% since then, most of which has come since early October last year. The stock is currently at HK$10.16 after falling 0.6% yesterday.
The A-share CB was arranged by Haitong Securities and UBS Securities. The international arms of the same two banks, ie Haitong International and UBS were also joint bookrunners on the H-share placement last year.
