Fosun International, a private-sector Chinese conglomerate listed in Hong Kong, raised HK$3.875 billion ($500 million) from a guaranteed and secured convertible bond after the market closed on Wednesday, taking advantage of a strong share price performance in the past 12 months.
The deal was two times covered and attracted more than 70 investors, according to a source but, from a technical point of view, the valuation was quite aggressive and the CB traded slightly below par in the secondary market on Thursday.
Fosun has a high-yield rating from both Standard & Poor’s and Moody’s (BB+/Ba3), which means it offered something different to the recent string of equity-linked deals of size in Asia that have come from issuers viewed as investment grade names (even if they don’t actually have a rating). The general view among CB bankers has been that this is what investors prefer and the demand on individual deals this year has supported that.
That said, the fact that Fosun is rated provided additional comfort in terms of the valuation, as did the fact that it has an outstanding bond that matures in 2016 – the same year as the put option on the CB comes into play. One CB-specialist noted that there is a lack of deals by rated issuers in Asia in general and such paper does tend to attract quite a lot of attention.
Interestingly, there was a second CB in the market on Wednesday evening that was also by a rated high-yield issuer – Hong Kong-listed Fufeng Group. The small-cap producer of MSG and other corn-based bio-chemical products raised $160 million from a renminbi-denominated transaction that was also well received. That CB traded up in the secondary market.
Both Fosun and Fufeng offered sizeable coupons and back-ended yields, which would have helped attract some investors. Fosun came with a coupon of up to 1.5% and a back-ended yield of up to 2.75%, while Fufeng offered a 3% coupon and a 4.5% yield. Before these two, six of the seven Asian CBs that have printed since mid-July have had a zero percent coupon.
The Fosun deal has a five-year maturity with a three-year put option, as well as a three-year call, subject to a 130% hurdle. It ranks on par with, and shares the same collateral and guarantee package as, the company’s high-yield bonds maturing in 2016 and 2020. It was issued by a special purpose vehicle named Logo Star, but is guaranteed by Fosun.
It is denominated in Hong Kong dollars and was marketed at a base size of HK$3.875 billion ($500 million) plus an upsize option of HK$1.55 billion ($200 million). The latter was not exercised, however, so the final size was kept at $500 million.
It was offered with a coupon between 0.5% and 1.5%, an added yield of 2.0% to 2.75% and a conversion premium of 32.5% to 40% over Wednesday’s closing price of HK$7.55.
All the terms were fixed at the investor-friendly end, resulting in a coupon of 1.5%, a yield of 2.75% and a conversion premium of 32.5%. The latter translates into an initial conversion price of HK$10.
Before this deal, the share price had risen 84% in the past 12 months and on Monday this week it closed at its highest level since January 2008. However, the stock fell sharply in the first year after it listed in Hong Kong in July 2007 and, while it has recovered from those lows, it is still below the IPO price of HK$9.23.
The fact that there was a second CB in the market on the same night did not really have much impact on the demand, but the fact that the bond was indicated at about 99.5 in the grey market during the bookbuilding made it difficult to move the terms away from the investor-friendly end, the source said.
And in light of the fact that the bond traded even lower than that, at 99 to 99.25, on Thursday suggests that the market would not have been happy with a tighter pricing. Part of the decline may have been in response to the 7.6% drop in Fosun’s share price, which was bigger than the 5% stock skid people used in their models.
One reason for the large drop in the share price may have been that the company didn’t outline any specific use for the CB proceeds, saying only that it will go towards working capital and general corporate purposes. That made the deal look quite opportunistic, which may not be too popular with existing shareholders who will suffer a dilution if the CB is converted into equity.
The demand was skewed towards hedge funds and the source estimated that they took about 55% of the deal. About 40% went to outright long-only investors, while the remaining 5% was picked up by wealth management-type accounts.
The CB was marketed at a credit spread of 525bp, which offered a bit of margin versus Fosun’s straight 2016 bond that is trading at a spread of about 510bp. There is dividend protection above a 25% payout ratio, which based on the share price at the time of pricing translated into a dividend yield of about 2.4%.
The stock borrow cost was assumed at 1%. Sources said there was only about $50 million to $100 million of stock available to borrow in the market, however, and the price increased from 50bp to about 150bp during the marketing on the CB.
Based on the final terms and a historic volatility of about 35%, this resulted in a bond floor of 90.8% and an implied volatility of 31.5%. The latter is quite expensive, especially for a deal of this size, but it seems investors were okay with this because Fosun is rated and has a clear and actively traded bond to use as a benchmark for the valuation.
Shanghai-based Fosun is the largest non-state owned conglomerate in China and is sometimes compared to Li Ka-shing’s Hutchison Whampoa. Its businesses range from manufacturing of steel and pharmaceutics to property development, retail sales, final services and mining. It has a large exposure to companies listed in China’s A-share market, which makes it attractive for international investors who get only limited access to that market otherwise.
The CB was jointly arranged by Morgan Stanley and UBS.
