State-owned China Railway Construction Corp (CRCC) has executed the first H-share convertible since a new debt issue filing system came into force last September, raising $500 million from a deal that priced overnight on Monday.
The five non-call three-year offering came as something of a surprise to many market participants given it was launched on a day when Hong Kong’s benchmark Hang Seng Index dropped to its lowest level since September 2012.
Timing also appeared hardly ideal for CRCC since its stock price has more than halved since April last year and fallen 22.58% in the year to Tuesday’s close. Furthermore, the deal was completed before the announcement of fourth quarter results, which means the company was unable to mitigate the sluggish market backdrop with potential earnings momentum.
As a result of its plunging share price, CRCC has also ended up raising far less than the $1 billion it targeted when it first filed for a bond issue last November. This is because companies are limited to issuing no more than 20% of their existing H-share capital without special shareholder approval.
This restricted maximum proceeds to $570 million. However, one source told FinanceAsia that a $500 million transaction in the context of current market conditions should be viewed as a successful result.
Terms
Initial terms were built around a zero-coupon, zero-yield structure, with a conversion premium range of 37.5% - 42.5% relative to CRCC’s close of HK$7.49 on Monday. Given the market backdrop the deal unsurprisingly priced at the very bottom of the range, translating to a conversion price of HK$10.30.
The five-year convertible bond features a standard three-year put option and is puttable and redeemable at par.
One market participant said the syndicate appeared to have marketed the deal at a reasonable valuation, with the bonds trading around par in the grey market immediately after pricing. They then opened 25bp higher in secondary trading early Tuesday morning before advancing to 101.45%/101.95% by Tuesday close according to one broker. At this level, they were yielding -0.2875%/-0.3855%.
One source close to the deal said there was decent demand thanks to the stock’s high liquidity and abundant stock borrow. Overall, the book closed about two times covered.
Syndicate bankers calculated a bond floor of 92.5% and implied volatility of around 27% – 28% for the new bond, based on underlying assumptions of a credit spread of 150bp and stock borrow at 50bp.
The bond has a theoretical value of around 105% on a 40% volatility assumption. However, some market participants described the terms as “too generous” given the ups and downs the stock has gone through in a highly volatile year for Chinese stocks.
CRCC is also expected to be one of the chief beneficiaries of the government’s One Belt, One Road strategy so some investors may have purchased the deal confident they have got in at a good level ahead of future market stabilization. “We think rational investors may sooner or later realize the convertible bond issuance does not violate the interest of shareholders, especially for those who purchases the shares below HK$10,” DBS said in a research note.
Most of the company’s existing debt is denominated in renminbi, so the new bond issue could also help diversity the A3/A- rated company’s currency and credit risk.
JP Morgan, CICC and UBS were joint bookrunners.
New rules
CRCC’s new issue is the first H-share convertible bond since Sinopec’s $1.5 billion deal in 2007. It is also the first equity-linked deal since the National Development and Reform Commission unveiled a revised set of debt issuance rules last September, simplifying the approval process for issuing offshore debt.
Under the new regime, issuers are required to file their applications before issuing offshore debt and the NDRC will approve it within five working days. They are then required to submit finalised details within 10 days of completing the sale.
Other companies that have already filed to issue offshore convertible debt include locomotive maker CRRC and construction giant China Railway Group.
