Chinese Estates rode to the relief of the regional convertible market yesterday with a HK$1.5 billion ($193 million) deal on Wednesday. The five-year bonds have a zero coupon and a zero yield and were issued at par.
The conversion price is set at 15% above the reference share price of HK$6.408, which was the volume weighted average share price for Wednesday trading in Chinese Estates stock. The stock on Wednesday had traded up a huge 11%, on the back of large volume of retail buyers excited by the Hong Kong real estate market.<//p>
The sole book runner, Deutsche Bank, launched the Reg-S deal after the market closed on Wednesday, going out with a range of 15%-23%. It was decided to price at the bottom of the range and using the VWAP price so as to leave investors something on the table. Still Chinese Estates managed to get the deal done at a 22% premium to its share price on Tuesday's close.
The books were understood to be closed within four hours having been oversubscribed by 1.5 times. In terms of allocations, 35% of the issue went to Asian accounts, 25% to European and 40% to offshore US accounts. There is a HK $500 million greenshoe, which if exercised, will make this issue the largest Asian convertible of the year so far.
The bonds have a call in year two subject to a 130% trigger, or if at least 90% of the amount of the bonds had been redeemed, purchased, converted or cancelled.
The bonds also carry a reset allowing the conversion price to be reset 12 months after closing, if the average market price of the bonds is less than the conversion price. If so, then the price can be adjusted down. There is also an investor put at year two at the put price of 100%.
The leads used a credit spread of 250bp over libor and a historical volatility of 35%. The bonds were priced at theoretical 102. There is said to be some asset swap demand.
For Chinese Estates, the deal massively increases its free float of stock, if the bond is converted, from a level of 18% up to 29%. Achieving this while selling stock at a premium made good financial sense. Also managing to sell a zero coupon, zero yield structure while Hong Kong interest rates have gone up 70bps in the last month, is an achievement.
While the bond is welcome, it is not likely to start a mad stampede into the market by issuers. Nevertheless, in general, the market will welcome this first sign of life back into a very quiet equity linked market. "Issuers in Hong Kong tend to have very good market timing," says one banker. "Most companies have seen their share price rise a bit but their volatility is down so they cannot get a good price for the option. On top of this, spreads are very tight in the bond markets so they can get cheap finance there."
