Chinese lottery company sells $105 million CB

Rexlot Holdings, a provider of systems, machinery and services for the lottery market in China, surprised the market last week with a Hong Kong dollar-denominated convertible bond – the first Asian equity-linked deal since Posco sold $320 million of yen-denominated bonds exchangeable into SK Telecom in early August.

The five-put-three deal, which was arranged by Daiwa Capital Markets, hit the market after the close of Hong Kong trading on Wednesday, even as global equity markets continued to struggle and Rexlot was trading close to its 12-month low from a month ago. At the time of the deal, the share price was down 42% so far this year.

At HK$816.9 million ($105 million) the CB was quite small and it was placed with just 15 investors or so. Still, the fact that the issuer got it done at all in the current market environment is notable.

According to a source, Daiwa had been advising Rexlot for a couple of months on its need for financing however tricky the market is looking at present, they felt there was a window to push out a deal last week. Hong Kong’s Hang Seng Index fell 1% to a fresh 12 month low on Wednesday, but Rexlot itself was up 6.7% in the past two days and European markets had opened higher. Most likely the bookrunner had also ensured there was enough interest to cover the bulk of the transaction before launch, giving it the confidence to go ahead.

The deal was completed in about two hours, which meant it was done and dusted before markets in Europe and the US took another turn for the worst that night. This in turn triggered another sell-off in Hong Kong on Thursday, with the Hang Seng Index losing 4.85%. Rexlot was suspended from trading that day to complete the necessary filings to the stock exchange, and this helped the CB to hold slightly above par. According to one source, it was quoted at 100.25 to 101 in the late afternoon, although there wasn’t much trading given the small number of investors.

Also, the buyers were mainly European outright investors, who bought for the longer-term.

To help attract investors, the deal came with a fixed 6% coupon. This looked quite high on paper, but may have been necessary given that Rexlot is unrated and has a market capitalisation of only $475 million. Larger and more established issuers like Agile Property and Wharf Holdings sold CBs with a 4% coupon and a 2.3% coupon respectively earlier this year when the market was in better shape.

Rexlot didn’t compromise much on the conversion premium, however. It was offered at 30% to 35% over Wednesday’s closing price of HK$0.475, reflecting the management’s bullish view on the business. It was fixed at 30% for an initial conversion price of HK$0.6175 – a level Rexlot last traded at in July this year. It is callable after three years, subject to a 130% hurdle.

The deal came with an upsize option of HK$145.5 million ($19 million), which wasn’t immediately exercised, but could boost the total deal size to $124 million if it is put to use in the next 30 days. On top of that, Rexlot will sell an additional $10 million worth of CBs with the same terms to Victor Chan, a substantial shareholder with a 15.4% stake in the company, subject to shareholders’ approval at a special general meeting.

The total proceeds will be for working capital and to pursue future opportunities in the lottery market in China, particularly in the new electronic lottery market. Rexlot, which counts both the Welfare and the Sports lottery in China as major customers, has been testing a mobile electronic lottery platform in Liaoning province since May and according to analysts is expected to launch tests in other provinces in the near term as well. Analysts at Daiwa also suggested in a recent research note that the company may be looking to acquire an internet lottery platform as a way to further capture the growth opportunities in the electronic lottery market.

The CB was marketed at a credit spread of 700bp over Hibor, which was slightly wider than the 500bp to 600bp level that Tsinlien Group is currently trading at. Tsinlien is a holding company wholly owned by the Tianjin municipal government, which in March sold $200 million worth of five-year renminbi-denominated bonds exchangeable into its Hong Kong-listed infrastructure and utility unit, Tianjin Development Holdings. However it was below the Chinese property developers that trade at credit spreads of 1,000bp or above.

There was some stock borrow available in the market at 3%, and investors will be compensated for a cash dividend above a 2% yield. At the final terms this resulted in a bond floor of around 95% and an implied volatility of 24%. This is quite cheap compared with the 260-day historic vol of about 45%, although at the moment the historic vol of most stock is quite high.

After resuming trading on Friday, Rexlot’s share price fell as much as 16.8%, but recovered to finish the session 6.3% lower – a new 12-month low.

This was the first Asian CB arranged by Daiwa since it bought KBC’s global CB distribution and secondary market platform in July last year.