Two China related transactions have slipped into the convertible market ahead of the expected autumn rush from Taiwan. Of the two, a $150 million convertible for Beijing Datang Power stands as a true benchmark since it is the first convertible from the H share sector since Huaneng Power in early 1997 and only the third to date.
Many had long wondered whether the deal would ever get through all the regulatory and bureaucratic hurdles it faced and indeed it has been two years in the making. Part of the delay stemmed from the re-organisation of the power sector, which has led to the emergence of five core IPP groups of which Beijing Datang is one.
UBS run the books on the deal, which also has the highest conversion premium and lowest coupon on record for a pure Chinese issuer. In a more recent context, the deal has an aggressive conversion premium given its stock price has run up 70% so far this year and a low bond floor considering its three-year maturity and lack of stock borrow. Had the deal emerged before the summer break, it is also possible it could have added a zero yield structure to the list as well.
Exceptionally strong demand meant that pricing came at the tight end of indicative terms with a coupon of 0.75% compared to a marketed range of 0.75% to 1%. The five-year deal has a three-year put at par, three-year call subject to a 130% trigger and redemption at par. The conversion premium was set at 30% to the stock's HK$4.275 close, against the tight end of a 25% to 30% range.
Underlying assumptions comprise a bond floor of 91.2%, theoretical value of 100.6% and implied volatility of 35.6%. This is based on a credit spread of 80bp, 5% borrow cost and 37% volatility assumption. Dividend protection allows Beijing Datang to grow dividends by 15% per annum from last year's Rmb0.12 level before making any adjustments.
After keeping the book open for just two-and-a-half hours, demand had topped the 10 times oversubscription mark with no accounts asking for asset swap. As one observer comments, "This is a rock solid credit, which has the BBB+ sovereign ceiling rating. China bonds have performed well all year and investors expect them to continue to do so."
Some 130 names were counted in the book, which was allocated two-thirds Europe, one-third Asia.
The rarity value of China versus the ubiquity of Taiwan is most clearly expressed in Beijing Datang's bond floor, which stands three to four points lower than a comparable credit with no borrow from the Island Republic. Few expect Beijing Datang to presage a new wave of issuance from China and this in tandem with the huge liquidity of the offshore China market gave the deal its backbone.
Proceeds are being used to finance the purchase of imported power equipment and to re-finance part of the company's existing foreign exchange reserves. With installed capacity of MW5,868 at the end of 2002, Beijing Datang has a 38% market share for the key Beijing-Tianjin-Tangshan area.
The deal was marketed as a warrant on Chinese growth and in 2002 demand in its service outstripped the 10.3% national average by a further 1.5%. And despite the run-up in the share price, analysts still have a fairly bullish outlook on the sector. In August, the Chinese government imposed higher tariffs to counter a supply/demand imbalance, which has seen 19 service areas were face shortages.
One day earlier, JPMorgan heralded the autumn's deal flow with a $130 million convertible for China Travel International. The lead could have hardly picked a worse day to launch a deal, with the Hong Kong Stock Exchange closed as the worst typhoon of the year raged its way through the Territory.
Outside observers conclude that an overeager borrower was at fault and its decision led to a large number of logistical problems and an unusual syndication process. In particular, some bonds were set aside for some key investors below the issue price of par, although the lead was able to absorb a fair amount of pain given it was awarded the deal on base fees of 2.3%.
Having been formally awarded the mandate on Monday, JPMorgan was faced with the prospect of turning the deal around extremely quickly. It ended up trying to price it on the run after a short two-hour bookbuild, but was able to exercise the $20 million greenshoe immediately, lifting deal proceeds up to $150 million.
The main problem it faced was the closure of the HKSE and no clarity whether it would re-open on Wednesday.
This uncertainty was further compounded by a Chinese government announcement concerning an easing of travel restrictions, which was having a material impact on the share price. Some analysts question how much China Travel stands to gain from the move, since it has always derived significant revenue the fact that Mainland tourists were previously forced to book a group tour in order to visit the Territory, rather than apply for an individual permit.
This failed to stop a sharp spike in the company's share price, however. Having hit a low of HK$0.84 at the height of SARS in April, the stock had traded up to HK1.65 on Tuesday, representing a year-to-date increase of 34.15%. On Tuesday alone, it is said to have climbed 5%.
Pricing of the convertible came at a 15.15% premium. The five-year deal has a zero coupon structure with redemption at 108.428% and a put in year three at 104.975% to yield 1.625%. There is also a call option after 18 months subject to a 130% hurdle.
Underlying assumptions comprise a low bond floor of 91.97%, theoretical value of 103.4% and implied volatility of 31.2%. This is based on a credit spread of 135bp, 5% borrow cost and 38% volatility assumption. There are also unusual dividend protection measures deriving from a suspension of dividends earlier in the year after SARs wiped out first half profits.
These state there will be an adjustment to the conversion price in the event that the dividend pay-out ratio exceeds 65% of China Travel's net income. In fiscal year 2001/2002, China Travel's pay-out ratio was 70%, equating to a dividend of nine cents per share.
Convertible specialists say that logistics aside, the final terms were reasonable and once momentum started to build, the deal closed three times covered with participation by 50 accounts. Allocations saw 50% placed in Europe, 10% in Asia and the remainder with offshore US investors. Asset swap demand accounted for about 30%.
Within a day of trading, pricing levels were further underscored by the deal's secondary market trading pattern a shade above par.
