Zhejiang Expressway broke new ground for Asian equity-linked specialists on Wednesday, raising €365 million ($390 million) from the region’s first euro-denominated convertible bond — a deal that was met with massive demand at the tightest end of guidance.
After announcing its intention to issue US dollar convertible bonds in September, the Chinese toll road operator made what appears to be a smart move to switch to the euro market, taking advantage of the relatively lower funding cost against the US dollar.
The decision was largely driven by the fact that US interest rates have risen 50bp since the announcement, making a dollar-denominated zero-coupon deal harder to execute, according to sources familiar with the situation.
The three-year euro/dollar basis swap spread has also widened to 182bp on Wednesday from about 110bp last September. That has allowed issuers to offer investors higher euro-denominated bond spreads without bloating their after-swap funding costs.
The improvement in pricing drove Zhejiang Expressway to the euro market despite the fact that it does not have operational needs for the currency (all of its operations are within China). The company manages some of China’s busiest toll roads, including the 248-kilometer Shanghai-Hangzhou-Ningbo Expressway that connects Shanghai with the two biggest cities of Zhejiang province.
One bond trader said there was rarity value in a deal from a relatively small issuer like Zhejiang Expressway, which is a government-backed entity at the provincial level. While it is not unusual to see deals from Asian issuers in the conventional euro bond market — as opposed to the convertible bond market — these deals tend to come from sovereigns or banks and corporations that have global reach.
And for convertible bond investors in particular, the deal has opened up a new currency exposure in an asset class where most deals are executed in US dollars.
Terms
Zhejiang Expressway’s five-year zero-coupon convertible bond was launched with a 27.5% to 32.5% premium over the company’s HK$9.89 Wednesday close of its H-shares, which have already rallied 34% year-to-date.
But the syndicate saw no difficulty in pricing at the tightest end for investors on the back of overwhelming demand, with bankers reporting a heavily oversubscribed book of over 120 accounts from European and Asian outrights and hedge funds. That was despite the fact that the bond — and the issuer — are unrated.
“There has been quite a bit of order inflation as investors try to maximise their chance of getting allocations,” a banker familiar with the situation told FinanceAsia. “There were a lot of accounts that we do not normally see in the market coming in size.”
According to the banker, the syndicate had to leave around a third of bidders with no allocation. The heavy demand allowed them to be picky — the final allocations were heavily skewed towards outright accounts.
At final pricing the strike price was set at HK$13.1, which is slightly above the stock’s all-time high of HK$12.94. From the issuer’s perspective, the bond is an almost zero-cost financing option since it is unlikely to be converted at such high level unless there are earnings surprises.
But any earnings surprise is unlikely since Zhejiang Expressway is considered a defensive stock that relies heavily on toll income, which typically grows at less than 10% per year.
The company could however see a short-term rally in its stock price as it is ready to list its brokerage business Zheshang Securities through an initial public offering in Shanghai by the end of June.
Assumptions
The syndicate had guided investors with a credit spread assumption of 150bp, representing a 30bp pickup to BBB/BBB/Baa2 rated Shenzhen Expressway’s 2021 vanilla bond, which is seen as the closest comparable.
Some bond traders have however argued for a premium as high as 80bp over Shenzhen Expressway, putting emphasis on the unrated profile of the issuer and the higher uncertainties facing Zhejiang Expressway’s brokerage business.
Based on syndicate assumptions the new deal has a 95.7% bond floor and an implied volatility of around 22% at the final price.
The new bond was well-received in the secondary market, with indications of as high as 101.125/101.75 in the grey market immediately after launch. It was trading at around 101.85/102.05 on Thursday morning.
The bookrunners of the deal were BOC International, CICC and Citigroup.
