Gome Electrical Appliance Holdings has raised $345 million from the sale of a five-year renminbi-denominated, US dollar-settled convertible bond, which it will use to cover a potential buyback of outstanding convertible bonds. The existing bonds, which were issued in 2007, can be put back to the company in May 2010.
Gome initially sold Rmb2.05 billion ($300 million) of the new CB late Tuesday, but after a strong performance in the secondary market, it exercised $45 million of the $50 million upsize option yesterday, bringing the total deal size to $345 million.
The offering was multiple times covered and attracted about 40 investors, some of which also hold the existing CB, the sources said.
Part of the interest may have related to the fact that Gome is a liquid stock with plenty of stock borrow available for CB holders who wish to hedge the equity option, and indeed a bit more than half of the deal was placed with hedge funds. The rest went to outright investors who would have been buying the CB as a way to play the equity story.
CB specialists say the demand was underpinned by the terms which were "fair to friendly" for investors -- at least with regard to the coupon and the yield. It is possible that this may have been a way for sole bookrunner J.P. Morgan to make amends to investors for a $400 million CB it sold on behalf of Olam International earlier this month. The Olam deal, on which Standard Chartered was a joint bookrunner with 25% of the economics, was launched with aggressive terms, forcing a revision of both the coupon and the premium, as well as a re-offer of the bonds well below par before investors could be convinced to buy.
One indication that the Gome CB was priced on the cheap side is that the bonds traded up to 103 in the secondary market yesterday, despite a 3.6% drop in the share price.
However, Gome didn't get a bad deal. In fact, it achieved one of the highest premiums on an Asian CB this year at 29% and it was also able to keep the coupon down by offering additional yield in case the bonds are held to put or maturity.
The premium was indicated at between 27% and 32% over Tuesday's closing price of HK$2.20. The final premium of 29% gives an initial conversion price of HK$2.838, and while it may be on the high side relative to other deals this year, from an investor's point of view it seems quite achievable considering that Gome's share price traded consistently above HK$3 in the months before the onset of the financial crisis in September last year.
The coupon was fixed at 3% after being offered in a range of between 2.5% and 3%, while the yield was fixed slightly inside the wide end of the 3.25% to 4.25% range, at 4.15%. The bonds have a five-year maturity, but can be put back to the issuer on the second anniversary. There is also an issuer call after three years, subject to a 130% hurdle.
Investors were in agreement on the credit spread, which was indicated at 700bp to 800bp. Together with a stock borrow cost of 0.75%-1% and a full dividend pass-through, the bond floor ended up at 93% with an implied volatility of about 29%.
This was the third fundraising by China's largest home electronics retail chain in three months. In June the company took on private investment firm Bain Capital Partners as a minority shareholder and shortly thereafter launched a rights issue that was fully underwritten by Bain. The connected events left Bain with an indicated 9.8% stake in the company (through a seven-year convertible bond) and gave Gome $417 million of fresh capital.
The introduction of such a reputable shareholder -- Bain has three seats on the Gome board -- helped to boost investor confidence in the company and allowed the stock to resume trading after a seven-month suspension brought on by the disappearance of the company's founding chairman Wong Kwong Yu in November last year. Since the suspension was lifted, the share price has almost doubled and trading volumes have returned to the levels where they were before Wong became the subject of an investigation looking into alleged stockmarket manipulation. Wong was suspended from his duties at Gome in December and although he is still the largest shareholder with slightly more the 30%, he is no longer involved in the running of the company. Chen Xiao was appointed new chairman in December.
Through these actions, Gome has successfully managed to put the whole scandal related to Wong behind it and is once again free to focus on outselling its rivals. In 2008, the company had a leading 6.7% share of China's home electronics market in terms of sales, which was more than twice the 4.8% share claimed by number two player Suning Appliance Chain Store (Group), as per data from consultancy Euromonitor. Among the 14 analysts who cover the stock, according to Bloomberg, eight have a "buy" on it and four analysts recommend investors to "hold".
Sources say the earlier fundraisings meant that Gome was already sufficiently capitalised to cover a potential put of the $600 million 2014 CB next year, but the company chose to act prudently and raise a bit more while the opportunity was there. The fact that the company wasn't acting with its back against the wall meant that the new bonds were well received by investors.
In a statement issued yesterday, Gome said that the new CB may, if converted, enlarge and solidify its existing shareholder base, and at the same time will be instrumental in tackling the redemption of the old 2014 CB, which it said had "remained a potential debt risk". "This provides further grounds for the company to operate completely on the right track and thrive. The issuance not only signifies resonance in the capital markets on the company's strategic transformation and corporate governance improvement, but also great confidence in Gome's management team," it said.
