Chinese retailers tap the Hong Kong dollar CB market

While the large number of new initial public offerings in the market is clearly getting a lot of attention from investors and bankers, these deals are by no means detracting from business in other parts of the capital markets. In fact, the demand for the IPOs so far seems to have inspired a pickup in the issuance of convertible bonds as well.

On Monday two Chinese companies, both in the consumer retail sector, came to market with Hong Kong-dollar denominated CBs, taking advantage of the current appetite for consumption-related stock. Both deals were well received to the extent that they could be upsized and both of them traded up yesterday, which is clearly good for the CB market and bodes well for other issuers that may be considering a deal of their own.

Hengdeli Holdings, a retail and wholesale distributor of branded watches, raised HK$2.5 billion ($322 million) from the sale of five-year CBs that can be put back to the company after three years. The deal was originally launched at a base size of HK$1.95 billion with an upsize option of HK$680 million, and while the demand was strong enough to increase the deal size by the full amount, at the final terms it was unable to issue more than HK$2.5 billion. That’s because it would have gone above the limit of 20% of share capital that the company can raise without shareholder approval.

Roughly around the same time, Intime Department Store sold HK$1.941 billion ($250 million) of three-year CBs that were upsized in full from an original deal size of about $200 million.

The Intime deal, which was arranged by Bank of America Merrill Lynch, Morgan Stanley and UBS, achieved slightly better terms, including a higher conversion premium, partly because the controlling shareholder entered into a stock lending agreement for 75 million shares with two of the bookrunners to help stabilise the stock borrow that was already available in the market. That would have made the deal more appealing to hedge funds, although a source said the final demand was still “healthily weighted” towards outright investors. Intime is also a somewhat more liquid stock than Hengdeli.

According to the source, there had been a lot of reverse inquiries from investors who were interested in Intime stock after Warburg Pincus sold just over one-third of its stake in the company in late August, raising $133 million at a 7.1% discount. By the time the CB was launched after the market close on Monday, Intime’s share price had risen 12.3% since that deal and was trading just 10 HK cents below the record high close of HK$10.50 reached last Friday.

The CB was covered in less than an hour, and while some market watchers were pointing to the fact that the deal was offered just below par in the grey market during the bookbuilding, others said that selling appeared to be done mostly by one player that was shorting the deal. In any case, the bonds traded above par after pricing and late yesterday afternoon they were quoted at 100.4 to 100.6. In all, the deal was about three times covered.