China Green CB has a tough first day

China Green Holdings, which priced a Rmb1.35 billion ($198 million) three-year convertible bond late on Wednesday, had a tough day in the market yesterday with the CB tumbling to 96.75-97 late in Asian trading, according to market participants.

The decline was much greater than what could be explained by the 3.1% drop in the share price, and somewhat surprising given the seemingly favourable response to the initial sale on Wednesday. The CB was more than two times covered and was upsized from Rmb1.2 billion, by making use of half the Rmb300 million upsize option.

The deal was also priced at best terms for investors, suggesting that bookrunners Macquarie and UBS didn't push investors too much in terms of price at least.

However, there is clearly a certain amount of risk attached to Hong Kong-listed China Green, a small-cap producer and supplier of fresh and processed vegetables and fruit, as evidenced by the fact that the CB came with a covenant requiring the issuer to maintain a gross debt-to-Ebitda ratio of less than four times during the life of the CB. The deal also came with upstream guarantees from the company's offshore subsidiaries. 

Still, no other CB this year has been as large as China Green in relation to market capitalisation (about $1 billion) and daily trading volumes ($2 million), one source said. The deal is also completely unhedgeable. Countering that somewhat was the fact that the CB has a maturity of only three years.  

China Green's struggles in the secondary market were in sharp contrast to the trading of CapitaCommercial Trust's S$225 million ($161 million) CB, which priced slightly earlier on Wednesday. While trading slightly below par in the grey market shortly after pricing, the CCT bond recovered strongly yesterday and, at the end of the day, it was quoted at 100.5-101. The secondary market demand was likely partly driven by the fact that many investors were scaled back significantly during the initial allocation, with some not receiving any bonds at all.

This was said to have been caused by a couple of large orders that were of the "fill or kill" type, meaning the investors wanted either to get allocated in full, or not at all - and not surprisingly, Credit Suisse, as the sole bookrunner, chose to prioritise those large orders.

CCT didn't immediately make use of the S$25 million upsize option, but if the CB continues to trade well, it will likely do so. The bookrunner has 30 days to exercise the option.

China Green was marketed with a coupon between 2.5% and 3.0% and a yield to maturity of 4.5% to 5.0%. Both were fixed at the top end. The conversion premium was set at 20% over Wednesday's close of HK$9.37 after being offered at 20% to 25%.

The deal is denominated in renminbi, but settled in US dollars. It has no put and no issuer call.

The bookrunners were using a credit spread of 750bp to 800bp over the renminbi swap rate and a 5% stock borrow cost, and investors will get compensated if the dividend payout ratio exceeds 30%.

Based on those assumptions and the final terms, the implied volatility was about 20% and the bond floor around 95%. Given the lack of hedging opportunities, most of the buyers would have bought the CB for the potential equity upside, however, which means the implied volatility was of less important. Indeed, a source noted that there was "significant" outright demand from Europe, interspersed with some hedge fund orders. All in all, about 50 accounts bought into the transaction.

Some of the buyers were likely comforted by the fact that China Green is a repeat issuer with two other CBs under its belt. The first one has been converted in full and the company will use the proceeds from this latest transaction to buy back the second deal, which matures in late October this year. That bond has the full Rmb1 billion still outstanding and is currently trading slightly below 99 with a parity of 77.3. The latter makes it highly unlikely that the bonds will convert before they mature.

The new CB has several features in common with the existing bonds, including the three-year maturity and the gross debt-to-Ebitda covenant. And some of the investors in the existing bonds did also buy the new one.