The outperformance of Asian convertibles relative to their global peers so far this year helped drive the completion of a $90 million convertible for China's largest noodle manufacturer Tingyi Holdings yesterday (Tuesday).
Key for lead manager Morgan Stanley was its ability to structure a transaction which was compelling enough for investors that are likely to have looked twice at a company with a more eventful track-record than most since listing on the Stock Exchange of Hong Kong in 1996. Since that date, Tingyi has been subject to a public censure hearing in relation to the granting of company loans to connected parties, breached the covenants of an outstanding convertible deal and diluted existing investors when the Taiwanese founders bought in Sanyo Foods in 1998 as a strategic partner with a 33.188% stake funded through the issuance of primary shares.
In terms of coupon and yield, the deal consequently ranks as the cheapest of 2002 year-to-date and closed yesterday four times oversubscribed with a total of just over 100 investors. Final terms comprised a 3.5% coupon, 15% conversion premium over a spot price of HK$2.25, yield-to-maturity of 6.875% and premium redemption in year three at 111%. The deal is also callable after year two subject to a 130% hurdle and there is also a 10% greenshoe.
In the secondary market, the only other deals this year trading on a yield above the 4% mark are Taiwan's Ritek on 5.61% alongside Hong Kong's Sino Land on 5.58% and PCCW on 4.86%.
Underlying assumptions for Tingyi's deal comprise a bond floor of 96%, theoretical value of 106% and implied volatility of 16%. This is based on a credit spread assumption of 400bp over Libor, dividend yield of 2.8%, 500bp stock borrow cost and volatility assumption of 30%. Historic (100 day) volatility stands at 43%.
One of the most notable aspects of the transaction is the high credit spread, which was being bid in the asset swap market on a range of 375bp to 400bp at the time of pricing. Despite the fact that the company has much stronger credit fundamentals on a stand-alone basis, observers say the high spread reflects lingering investor concerns about the company's corporate governance record.
In its annual report, for example, Tingyi recorded 2001 EBITDA of $155.44 million and total debt of $388.66 million equating to a healthy debt to EBITDA ratio of 2.5 times. Similarly gearing stands at 40% and on a pure fundamentals basis, the company is said to stand at the BB+ level.
Observers say that investors main concern lay with the huge rally in the stock price, which closed prior to its suspension on Monday, up 79.39% year-to-date. On a p/e basis, Tingyi is also trading at 20 times 2002 earnings compared to a regional average of 14 times.
But, the company argues that the huge growth potential of China's food and beverage market will underpin a CAGR (compound annual growth rate) of 20% going forwards. China is not surprisingly the world's largest consumer of instant noodles with total production of 19 billion packets per year. On a per capita basis, however, consumption stands at 14 packets per year, well below a regional average of 40 packets.
Through its Mr Kon brand, Tingyi also dominates the market with a 40% share of the noodle market and even more impressive 57% share of the beverage sector for non-carbonated products.
Much of the recent stock rally has been propelled by strong 2001 results and more recently first quarter results, which showed a 67% increase in net profit to $22.3 million. The rally has also been underpinned by the decision not to declare an event of default on Tingyi's $130 million convertible of 1997, which matures this July.
The trustee and bondholders agreed to a waiver after the company placed $128.54 million into an escrow account to cover the re-payment ($95.721 million of remaining principal and $31.264 million for premium redemption). In its submission the company argued that the escrow payment would have a negligible impact on the company's operations since it had a net cash position of $199 million as of March 2002.
The breach of covenants had occurred in the first place because the original deal had stringent negative pledge conditions. These restricted Tingyi's ability to fund its Mainland capex since domestic bank debt is normally always secured.
Proceeds from the new deal effectively re-finance the old, although since the re-payment has already been made, the company can technically argue that it will fund its ongoing capex.
In terms of the order book, most orders were said to have come from outright accounts and fixed income investors, since the lack of borrow would make the stock unattractive for hedge funds. By geography, Europe took 60%, with Hong Kong on 20%, Singapore 5% and the US 15%.
