Hong Kong-listed Haitong International issued a HK$3.88 billion ($500 million) zero-coupon convertible bond on Tuesday, getting strong demand from investors for a deal that is bigger than its last two issues combined.
The BBB rated issuer managed to put together an order book of close to $1.5 billion from over 60 accounts, suggesting investors were hungry for more after previous Haitong deals have traded well in the secondary market.
Investors familiar with the issuer should have fresh memories of its two previous CBs, which were issued in 2013 and 2014. Both managed to hit their conversion prices within a year after issuance.
This time around, Haitong International turned more aggressive in terms of deal size, bringing to the market a chunky deal that is equivalent to 10.7% of its existing share capital upon full conversion. The new deal is more than the combined size of its outstanding HK$1 billion 2013 and HK$1.2 billion 2014 bonds.
The bookbuilding process was helped by Haitong International’s BBB rating from Standard & Poor’s, which it received in August 2014. The previous deals from the then-unrated issuer were largely supported by asset swaps, but that was not the case this time, according to one source.
The majority of the orders came from outright accounts in Europe. Hedge fund participation was limited despite the presence of stock borrow facilities that would allow hedge funds to profit by shorting Haitong's stock at the same time as buying the CB.
The deal was launched with 140 million shares of borrow — equivalent to approximately 25% of the deal — but one source said only a small portion was taken up.
To compensate for the relatively large deal size, Haitong International came up with an initial price guidance that some bond traders described as fairly conservative.
The zero coupon, Reg S-only deal was launched with full dividend protection and a yield-to-put of 0% to 0.5%. It had a standard five-year, three-year put structure and came with a conversion premium range of 30% to 40% to the stock’s Tuesday close.
The final pricing of the bond was settled towards the investor-friendly end, with a 0.5% yield-to-put and a 32% conversion premium, which translated to a final conversion price of HK$6.8112.
The timing of the deal was not ideal as it was launched after the Hang Seng Index fell 1.27% on Tuesday, following the end of China’s Golden Week holiday. But it turned out to be something of a lucky escape for the issuer, as it was able to close the book before US stocks finished 1.1% down afterwards.
The credit assumptions for the deal comprised a bond floor of 93.8%, an implied volatility of 25% and fair value of around 103% based on a credit spread of 160 basis points.
Haitong International, the overseas platform of mainland broker Haitong Securities, is considered to be one of the most aggressive Chinese brokers in the offshore market. It has been able to leverage on its parent’s $1.67 billion Hong Kong IPO in 2012 to expand its business.
In 2014, Haitong International acquired Asian equity research house Japaninvest for $24 million. A year later, it bought Portuguese investment bank Banco Espirito Santo for $467 million, making its foray outside Asia for the first time.
The joint global coordinators of the convertible bond sale were Haitong International and JP Morgan.
BOCOM International, China Industrial Securities, China Securities, Haitong Securities, HSBC, Ping An Securities and UBS were joint bookrunners.
