After a drawn-out bookbuilding that lasted almost 12 hours, aluminium producer China Hongqiao Group early yesterday morning priced its five-put-three convertible bond at the investor-friendly end, resulting in a 6.5% coupon and yield, and a 25% conversion premium.
It wasn’t able to exercise the $50 million upsize option, which meant the deal size stayed at $150 million, but sources said the bookrunners were able to place the majority of that with investors on the night.
It appears Barclays, which was the sole bookrunner for the deal, may have been left with some bonds, although not more than it was comfortable holding. As the CB was quoted as low as 98 in the grey market during the bookbuilding and fell even lower in the secondary market yesterday there was a lot of speculation that the bank had been left with a lot of bonds. However, one source noted that the deal was done on a best effort basis, which means Barclays could have reoffered the bonds below par if there wasn’t enough demand at the initial terms. And it didn’t do that.
As highlighted in a story on our website yesterday, investors were unhappy with several aspects of the deal, including the fact that part of the proceeds will be used to repay a bridge loan that it obtained from Barclays last year. While there has been no confirmation of the size of the loan — in fact Hongqiao didn’t even mention it among the potential use of proceeds in its announcement of the deal yesterday — one source said the repayment would account for more than half of the net proceeds. According to the term sheet, the rest will go towards expansion of production facilities and general corporate purposes.
Investors also didn’t like the fact that the deal came with a $50 million greenshoe on top of the $50 million upsize option as the greenshoe tends to act as a bit of an overhang on the bonds until it becomes clear whether it will be used or not. The company has 30 days to exercise the shoe.
But perhaps most importantly, many investors seemed to disagree with the credit spread that the bookrunners were using in its valuation of the deal. While the initial talk on Tuesday suggested that Barclays used a spread of 600bp over Libor, it was in fact using 700bp, which the source said was based on how other BB rated Chinese companies outside the real estate sector is trading. However, many investors disagreed and felt that a spread of 900bp or even 1,000bp would have been more appropriate, particularly since neither the credit nor the equity option can be hedged.
Based on a credit spread of 700bp, the bond floor worked out at 96.4%, which is significantly more attractive than the 91.4% bond floor that would be the result if one used a 900bp spread instead. The lower spread gave an implied volatility of 13.5%.
The CB was offered with a coupon and yield between 5.5% and 6.5% and a conversion premium of 25% to 35% over Monday’s close of HK$5.82. The final premium of 25% resulted in a conversion price of HK$7.27, which is below the record high of HK$7.99 that the stock hit in mid-April last year.
The deal features an issuer call after three years, subject to a 130% hurdle and the CB holders will be compensated for all dividend payments.
Given the high coupon of 6.5%, the reasonable premium and the fact that the CB cannot be hedged, the deal was clearly targeted at outright investors and the source said that it was sold mainly to core outright CB investors. He also acknowledged that the bonds were not widely distributed.
The deal came on the back of a non-deal roadshow that the Hongqiao did following its full-year results. In fact, the company chose to interrupt the roadshow in the middle to launch the deal in order to take advantage of a spike up in the share price. Some observers argued that the quick launch didn’t give outright investors enough time to look at the deal before they had to decide whether to commit capital or not and said this may have reduced the number of potential buyers and contributed to the struggle in getting the bonds out the door.
It is believed that this — the rushed launch — was one of the key reasons why Deutsche Bank and J.P. Morgan didn’t participate in the offering, even though they were arranging the non-deal roadshow together with Barclays.
The deal was launched in the early afternoon Hong Kong time on Tuesday after the stock was suspended from trading from 9am onwards.
Hongqiao listed in Hong Kong on March 25 last year after raising $822 million from an initial public offering. The company had initially planned to raise as much as $2.2 billion in January but aborted this first attempt citing volatile market conditions. The IPO was priced at HK$7.20 per share. After hitting a high in April, the share price assumed a downward trend that lasted until October and while it has had a reasonably strong run since early February this year – it was up close to 40% year-to-date before the transaction – the stock is still trading below the IPO price.
Hongqiao’s share price fell 5.5% when the stock resumed trading yesterday afternoon. By mid-afternoon the CB was quoted at 96.625 to 96.75, but edged slightly higher towards the end of the day.
