China Petrochemical Development raised $132 million from a zero-coupon convertible bond on Thursday to help it fund construction of a greenfield plant in the mainland’s Jiangsu province.
The deal has a five-year maturity with a three-year investor put and an issuer call after three years.
China Petrochemical’s convertible bond allows the company to raise capital at a yield of 1.75%. The securities will convert to equity at a premium of 18% over the stock’s closing price on Tuesday of NT$9.15 per share, in the middle of the guidance of 15% to 25%.
The conversion price was set at NT$10.80 per share, towards the top half of the NT$10.52 to NT$11.44 per unit range initially offered when books opened under Barclays, the sole global coordinator and bookrunner.
The convertible, described as a credit-enhanced zero-coupon on the term sheet, had the benefit of irrevocable standby letters of credit (SLBC) issued separately by Taiwan’s CTBC Bank and Taiwan Cooperative Bank. Using two banks to enhance the credit is unusual — typically issuers will use one bank. China Petrochemical elected to go with two banks to strengthen its credit, according to a source close to the deal.
“It was an SLBC-backed convertible bond by two of the larger banks in Taiwan. Both banks are pretty comparable and are A- rated [by S&P],” the source told FinanceAsia. Having the two banks enhancing the credit of the chemicals company — which is in a notoriously volatile sector — was key in securing investors during the bookbuild.
“No question it helped. It makes the credit much easier [and] led to strong participation from a broad [range of investors],” the source said. “The chemicals industry is very volatile but margins are slim [so] from a cash flow perspective it’s more challenging credit. But the Taiwanese banks know the assets well and had a much better feel for the situation on the ground. They were able to step up.”
Some 55% of the investors were hedge funds and 45% outrights. Geographically, 80% of the investors were located in Asia and the remaining 20% in Europe.
It is the fifth largest CB out of Taiwan this year. Siliconware Precision Industries raised $400 million in a CB in October, followed by Zhen Ding Technology’s $300 million CB in June, WPG Holdings’ $200 million note in June and Shin Kong Financial’s $167 million CB in July, according to Dealogic data.
The Taiwan-listed company makes chemicals such as caprolactam, the primary raw material used to make nylon fibres and resin, and acrylonitrile, used in acrylic fibre and plastics. China Petrochemical is Taiwan’s only caprolactam producer and the fifth largest in the world.
China’s petrochemical industry remains unpredictable and suffers from overcapacity, which has direct effects on the company’s earnings. China Petrochemical reported a net loss of NT$981 million ($31.5 million) for the nine months of 2014. “It’s like oil and gas or any other commodity-based business. It goes through two or three years of dynamic changes and margins,” the source said. “As it stands, the products they focus on are in oversupply.”
Still, the company remains bullish longterm and will put proceeds from the CB towards a greenfield project in Jiangsu province, with construction set to begin in 2015.
“They’re expecting a lot more demand growth in China, and operating costs will be lower if they’re onshore. So part of their strategy is to get a plant operating [in the mainland],” the source said.
