Existing bondholders came out in force to take up the tender offer for China Overseas Holdings’ existing exchangeable bonds (EBs) into Hong Kong-listed property developer China Overseas Land & Investment (COLI).
According to an announcement put out by COLI on Sunday, investors tendered $482.2 million worth of EBs, or 96.4% of the $500 million outstanding principal. Also, a large number of new investors put in orders for the new zero-coupon EB issued by unlisted China Overseas alongside the tender, allowing it to fix the deal size at $750 million.
When the new issue was launched last Tuesday, the issuer said the size would range from $650 million to $850 million. The deal has a seven-year maturity but can be put back to the issuer after 4.5 years.
Instead of a call, the issuer has the option to trigger a mandatory exchange after four years, subject to a 130% hurdle. The bonds cannot be exchanged into shares until January 1, 2015 but, given the high exchange premium, investors were not too worried about that.
The strong response to the tender would have been at least in part driven by the generous exchange price, which was fixed at approximately $146.31 for every $100 of bonds. That equalled the equity value of the bonds plus a premium of seven points. Before the announcement of the tender, the existing EB was trading at a price of about $136 for each $100 of face value.
Based on that price, it will cost China Overseas about $705 million to cover the tender. The rest of the proceeds will go towards the redemption of the remainder of the old EB, which matures in May, or alternatively towards the cash settlement of the same bonds in case the investors choose to exercise their exchange right.
The old EB is in the money but the issuer conducted a consent solicitation in connection with the tender that will allow it to settle all future exchanges into equity in cash. Bondholders who agreed to that amendment, including those that participated in the tender, will receive a consent fee of $0.25 per every $100 of face value.
A source said the total demand for the new bonds was approaching $1.3 billion but the issuer chose to cap the size at $750 million, partly to match the size of the tender, partly to ensure that its ownership in COLI will not fall below 51% if the bonds are exchanged into equity in full.
The demand for the new EB was pretty price sensitive and terms were fixed at the investor-friendly end of the indicative ranges, resulting in a 3.5% yield-to-put and a 50% exchange premium over the average volume-weighted average price (vwap) on Wednesday through Friday last week. (The bookbuilding for the new EB was kept open until 6pm Hong Kong time last Friday to match the time of the tender offer).
The share price gained 9.6% during those three days and the reference price worked out at HK$22.0683, compared to the closing price of HK$20.35 on Tuesday just before the new issue and the tender was announced. Add the two together and the initial exchange price came out at HK$33.10245 per share.
Based on Friday’s closing price of HK$22.30, the exchange premium is a slightly lower 48.4%.
The EB was offered with an exchange premium between 50% and 60% and a yield-to-put of 2.5% to 3.5%. Sources said the pricing was dictated largely by the existing EB holders as many of them were only willing to tender if they could also buy the new bonds at the investor-friendly end.
The strong gains in the share price during the three-day bookbuilding were largely due to the fact that the new EB has a much lower delta than the old one. That meant that existing EB holders that chose both to tender their old bonds and subscribe to the new ones had to buy more shares if they wanted to hedge the equity option in full.
Not all the investors that participated in the tender chose to subscribe to the new EB, however, and, according to one source, there was also a better response to the new bonds among outright investors than what was expected given the long maturity, the aggressive premium and the fact that there is plenty of stock borrow available. The majority of the demand still came from hedge funds, however.
There was no detailed information about how many investors participated in the new issue but sources said it was more than 50.
Based on the final terms and a credit spread of 250bp, the new deal comes with a high bond floor of just above 97% and an implied volatility of about 21%, the source said.
The EB was initially indicated at a price of 100 to 100.125 in the grey market and towards the end of the bookbuilding it was bid right around par.
China Overseas currently owns about 53.2% of COLI. Based on the final exchange price, that stake could drop to 51.03% if the new EB is fully exchanged into shares and the remainder of the old EB is cash settled, showing that the issuer wouldn’t have able to increase the size above $750 million without running the risk of having its ownership stake fall below 51%.
The new EB was issued by a wholly-owned unit of China Overseas Holdings called China Overseas Finance Investment, but it is fully guaranteed by the holding company.
At the final deal size, the new exchangeable into COLI is the largest equity-linked issue in Asia this year. The first full week of the year was a busy one for equity-linked issuance, however, with three more deals. Including a $200 million transaction in Japan, these four deals raised just over $1.4 billion.
Citi and Goldman Sachs were joint bookrunners for the new COLI EB as well as dealer managers for the tender.
