China Agri raises $601 million from CB/placement combination

China Agri-Industries Holdings, a producer and supplier of processed agricultural products, including biofuels, edible oils and rice, has raised $601 million from a concurrent convertible bond and placement that were extremely well received.

Investors were particularly enthusiastic about the Hong Kong-dollar denominated CB, allowing the base deal to be upsized to $400 million (HK$3.1 billion) from $300 million initially, while retaining a $100 million upsize option that can be exercised over the next 30 days. Although the conversion premium was fixed at best terms from the issuer's point of view, the bonds traded up in the grey market and in the early hours of the Hong Kong morning were said to be quoted at 102-103.

The concurrent placement certainly helped as it meant that the 30% conversion premium was set over the discounted placement price. When compared with yesterday's close, the premium falls to 19.7%.

However, the issuer is also viewed as a top-quality Chinese blue-chip, which meant investors were comfortable with the credit. Other attractions were a 1% coupon, which was just enough to draw outright investors into the deal, and the availability of stock borrow, which appealed to hedge funds and other CB investors who like to trade the volatility. At the same time, the issuer was happy as it got the premium it wanted and a larger-than-targeted deal size, which brought it a little bit closer to funding its aggressive capex plan this year.

In other words, the deal ticked most of the boxes and bankers said it could well be the one that will reopen the new issue CB market. However, that will also depend on how it trades in the aftermarket. Aside from a few aggressively priced CBs that have come under immediate downward pressure in the secondary market, there have been no really successful deals for the past couple of months at least, and as a result, both issuers and bankers have been wary about bringing new deals to market.

"The market needs a CB that trades well and that investors make money on" for the confidence to return, one banker said.

The China Agri CB was offered with a fixed coupon of 1%, a fixed yield of 2% and a conversion premium ranging from 25% to 30%. The bonds have a five-year maturity, but can be put back to the issuer after three years. There is also an issuer call after three years, subject to a 130% hurdle. The bonds were issued by Glory River Holdings, but are guaranteed by China Agri-Industries.

At the same time, the company offered 178 million shares through a top-up placement at a price between HK$8.75 and HK$9.00. The range equalled a discount of between 5.3% and 7.9% versus yesterday's closing price of HK$9.50. That deal was priced at the low end for the maximum discount of 7.9% and a total size of HK$1.56 billion ($201 million).

A source noted that the price was kept down partly because the share price had gained 5% over the past couple of days. However, quite a few of the investors who bought the equity also bought the CB, meaning there was a clear incentive for them to keep the placement price low. Using the placement price as a reference price for the CB, the conversion price becomes HK$11.375 -- a level that the stock traded at as recently as February this year.

Both the placement and the CB were said to have been multiple times covered, but while the equity attracted about 55 investors, the CB saw some 180 lines in the order book, sources said. The key for the latter was that the pricing was attractive both to outright investors who bought the deal for the equity story and to hedge funds. Clearly, the shortage of new CB issuance in Asia in the past couple of months played a role, while the backdrop of a strong equity session in Europe as the deal was launched provided additional comfort.

As mentioned earlier, CB investors also like the structure of a concurrent CB and equity placement as it typically means that the effective premium will be lower than that offered on paper. However, it is quite a rare structure in Asia with the most recent ones being small-cap Chinese real estate developer SRE Group's $130 million combined sale of Hong Kong-listed shares and CBs in early July 2009 and Singapore-listed Yanlord Land Group's $360 million combine a few weeks earlier. In India, Larsen & Toubro and Tata Motors both used a similar structure in October last year, although in both cases the CB was priced very cheaply to compensate for a tight discount on the equity and investors who bought the CB also had to take the equity.

The placement portion of the China Agri deal saw a decent geographical split, although the majority of the buyers came from Asia. The deal was not marketed to onshore US investors, which allowed both the equity and the CB to close at about 9.30pm Hong Kong time, after about 2.5 hours of bookbuilding.

The CB was marketed at a credit spread of 250bp, which was at the wide end of the 200bp to 250bp range where another (slightly shorter-dated) Chinese conglomerate -- Beijing Enterprises -- is trading at the moment, although some investors used a wider spread of 300bp. The stock borrow cost was assumed at 1% and CB holders will be compensated for cash dividends in full.

Based on a 250bp spread, the implied volatility would be just below 20% and the bond floor around 95.4%. A 300bp spread would push the implied vol to about 21% and the bond floor to 94.1%.

The deal was jointly arranged by J.P. Morgan and Morgan Stanley.