ENN Energy Holdings, a supplier of natural gas and other clean energy products in China, has become the fourth Asian company in two weeks to tap the equity-linked market.
The company last night sold $500 million of convertible bonds in a deal that was pretty similar to the slightly larger $503 million CB printed by Shanghai Industrial on January 16.
The two Hong Kong-listed companies have a similar market capitalisation and were viewed to be fairly equal in terms of credit quality. As a private-sector company, ENN Energy doesn’t have the same backing as Shanghai Industrial, which is a state-owned enterprise, but sources said it makes up for it by having an investment grade rating (it is rated Baa3 by Moody’s, BBB- by S&P and BBB by Fitch) – a rarity among private sector Chinese companies.
ENN Energy also has an outstanding straight bond maturing in 2021, which gave the CB investors additional comfort when assessing the credit quality.
Like Shanghai Industrial, a conglomerate with a key focus on real estate, this deal has a five-year maturity with a three-year put and comes with a zero coupon and a 30% conversion premium at the best end. Both stocks also offer plenty of stock borrow. ENN Energy did push the envelope by offering a slightly lower yield of 0% to 0.5% as well as a more aggressive bond floor, but partly thanks to the solid trading performance of Shanghai Industrial so far, it was able to get away with that.
Shanghai Industrial priced its CB with a 1% back-ended yield. On the first day after the deal, the Hong Kong dollar-denominated bonds edged up to 102 and they have been holding around those levels since.
“The investor appetite for high-quality CBs is strong right now as there is a lot of pent-up demand from last year,” said one CB specialist, referring to the fact that 2012 saw only $7.3 billion of new issuance in Asia ex-Japan outside of China’s A-share market. “This deal was slightly more aggressive (than Shanghai Industrial) but that’s where the market is right now.”
Investors do have their limits though and the terms were fixed at the investor-friendly end for a 0.5% yield-to-put and a 30% conversion premium over yesterday’s close of HK$37.40. The latter resulted in an initial conversion price of HK$48.62.
The conversion premium, which was marketed in a range between 30% and 40%, is equal to the Shanghai Industrial CB, but the conversion price looks quite steep when considering that ENN Energy is trading at record high levels after gaining 61% in the past 12 months.
However, investors seemed comfortable with that and when the deal closed at 9:30pm Hong Kong time, it had attracted just over $1 billion of worth of orders. The majority of the demand — about 65%, according to one source — came from outright investors and in all about 60 investors participated in the transaction.
Another sign that investors were okay with the pricing was the fact that the CB was changing hands slightly above par, at about 101, around the time of pricing.
The bonds were marketed with a credit spread of 175bp over Libor. This was based mainly on the fact that the company’s eight-year bond is trading at a spread of 220bp. The stock borrow cost was assumed at 1% and investors will be compensated for divided yields above 0.97%.
This gave a bond floor of 94.7% and an implied volatility of 23.5%, which compares with a 100-day historic vol of about 28%.
ENN Energy will use the proceeds for debt refinancing and other general corporate purposes.
According to the initial term sheet, J.P. Morgan was the sole bookrunner for the CB and that also appeared to be the case during the bookbuilding. However, when the final termsheet was sent out early this morning, UBS had been added as a joint bookrunner with 10% of the economics.
The Shanghai Industrial CB was arranged by Bank of America Merrill Lynch, Deutsche Bank and Goldman Sachs.
