Chongqing-based developer sells S$200 million worth of CBs

Ying Li International Real Estate, a Chinese property developer listed in Singapore, has become the third Asian company this year to raise fresh capital from a convertible bond with a S$200 million ($142 million) deal that priced late Thursday Hong Kong time. The bonds have a five-year maturity with a three-year put.

Ying Li focuses on commercial property development in Chongqing in Western China and said the proceeds from the CB will be used to finance two planned acquisitions in the prime commercial business district, which it announced earlier last week, and to start its Lu Zu project, which will comprise a centrally located grade-A office and retail development.

Investors like developers based in the western part of China as the government is prioritising the continued development of this region, but while a few of these names are now publicly traded -- Longfor Properties, Fantasia Holdings Group and CC Land Holdings are all listed in Hong Kong -- this was the first CB to offer exposure to that region. And perhaps that is why the deal managed to attract enough interest even though it was in the market on a night when US stocks took a significant tumble.

To make the deal more attractive to hedge funds, a company affiliated with Ying Li's chairman provided a small amount of shares to allow for a stock borrow facility that would enable them to hedge their exposure to the equity option. However, a source said about two-thirds of the deal was bought by outright investors who like the story and the company.

The investors weren't keen at any price, however, and the J.P. Morgan-led deal was priced at best terms for investors and the upsize option of S$75 million was not exercised. The company still has the option to do this on a later date, however. That may take some time though, as the bonds came under some pressure on Friday when the share price fell 7.3% to S$0.57. Sources close to the issuer said the CB had held around par throughout the day, although other market participants said they had seen it offered slightly below as well.

The drop in the share price by no means came in isolation as markets across Asia were down -- Singapore's Straits Index fell 1.1% -- but Ying Li did clearly underperform. Equity investors may have been concerned about the potential dilution as the company raised another S$154 million from a top-up placement of new shares just two months ago. That deal, which was priced at a 14.1% discount, was the first time that the company came on the radar screen of the broader international investment community as Ying Li never did an initial public offering, but listed through a reverse takeover in July 2008. However, investors who bought into the placement may not have expected another equity-linked fundraising so soon.

The CB was offered with a coupon ranging from 3.5% to 4% and a yield between 6% and 6.5%. They were both fixed at the wide end. All three CBs issued so far this year have offered a coupon plus an additional yield-to-put or maturity, and CB specialists expect that this structure will remain in favour as long as the demand from outright investors remains strong. It means that the investors will receive reasonable downside protection through the yield should the share price fail to perform, while at the same time the company can limit its annual interest costs.

The Ying Li bonds also have a mandatory conversion option after three years, which will kick-in if the CB trades above 130% of the conversion price.

The conversion premium was set at 28.5% over last Thursday's volume-weighted average price after being offered in a range between 28.5% and 31.5%. Since the share price closed slightly below the VWAP of S$0.6248 on that day, the premium over the close was slightly higher at 30.6%. Based on the premium over the closing price, this was the largest premium for an Asian real estate company in almost two years, according to a company statement.

The initial conversion price will be S$0.8029 -- a level that the share price exceeded in September and October before it started to retreat somewhat. Right before the top-up placement in November, the stock was trading at S$0.71, but the next day the price dropped 12.6% to S$0.62 and has traded sideways around that level since then.

The bonds were indicated at a credit spread of 900bp over the risk-free rate, which was based partly on the fact that Hong Kong-listed Country Garden, which has a CB outstanding and issued its first straight bonds in September last year, is quoted at a credit default swap spread of 875bp over. Ying Li's spread was adjusted for the fact that it is a lot smaller than Country Garden's, and for it being just a three-year issue.

The bonds offer full compensation for cash dividends and while the cost of the stock borrow facility wasn't disclosed, similar facilities are typically priced at 1.5%-2%. Together with the other terms, this resulted in a bond floor of about 90% and an implied volatility of 27.5%.

Ying Li said in an announcement to the Singapore Exchange that the CB was "multiple times oversubscribed". About 35-40 investors participated in the deal, and according to the source, about 60% of the demand came from European institutional investors. Some of that may have been due to the timing of the deal -- it wasn't launched until 9pm Hong Kong time and priced just after midnight -- although there had been some good buzz around Ying Li again this week that may have sparked their interest.

The company said last Tuesday that it is planning to buy two new sites in the Chongqing Yuzhong CBD, which have a combined gross floor area of 2.5 million square feet and are intended to be used for an integrated development of high-end office, retail and residential properties. The local government has earmarked Rmb600 billion ($88 billion) to reconstruct and develop the city centre as part of its effort to make Chongqing CBD a financial hub by 2015.

Ying Li's chairman and CEO, Fang Ming, said the CB had enabled the company to secure a "significant" amount of long-term money at attractive terms. "We believe that this is prudent capital management, especially during these turbulent times as the macroeconomy looks to a tighter credit market. It also provides us with ample financial capacity to take advantage of business opportunities that may arise in the near future."

Ying Li is the first Singaporean issuer to come to market this year. Interestingly though, all three deals have been offered in local currencies. Aside from Ying Li, Chinese coal producer Hidili Industry International Development raised Rmb1.707 billion ($250 million) from a renminbi-denominated and US dollar-settled CB, and Hong Kong property and hotel group Far East Consortium raised HK$800 million ($103 million) from a Hong Kong dollar-denominated deal. Both Hidili and Far Eastern Consortium are both listed in Hong Kong.