Hanjin Shipping issues $150 million CB

The shipping industry’s near-term outlook remains questionable amid slowing economic growth and a debt default in Europe not quite off the table yet, but after a rebound in its share price during the past two weeks Korea’s Hanjin Shipping saw a chance to raise new capital from a convertible bond issue on Wednesday.

With the downside protection and a decent coupon, investors were comfortable buying at these levels, allowing the company to raise $150 million from a five-year deal with a three-year put that was priced at the investor-friendly end of terms. In secondary market trading yesterday the CB was bid slightly above par at 100.125.

Existing shareholders reacted negatively to the deal, driving the share price down 7.3% yesterday to erase all the gains made during the past four days. The potential dilution won’t be too great, given that Hanjin has a market capitalisation of about $1.9 billion, but the company already has about $3 billion of debt and investors might have been disappointed that it has added further to its liabilities.

But Hanjin, which operates container ships as well bulk carriers and oil-and-gas tankers, is quite a volatile stock, and yesterday’s sell-off doesn’t necessarily stand out from the usual trading pattern. Before the deal, the share price had risen 21% from a 12-month low of W20,450 on June 20, but during the past 13 sessions it had also fallen more than 5% on two occasions.

The bonds, which were arranged by J.P. Morgan, were offered with a coupon and yield ranging from 3.5% to 4% and a conversion price between 20% and 25% over Wednesday’s closing price of W24,700. They also feature an issuer call after three years, subject to a three-year hurdle.

While sufficient in volume, the demand was price sensitive and as noted both the coupon and the premium were fixed at the investor-friendly end, resulting in a 4% coupon and a 20% premium. This gave a conversion price of W29,640 — a level that Hanjin was trading at as recently as early May. The share price hit a 2011 high above W40,000 in early January and has since fallen 45%, including yesterday’s drop.

Despite the sector gloom, analysts are generally positive on the stock at current levels with 21 of the 30 people covering it recommending investors to buy. Only three advise selling. The average 12-month target price is W36,681, or 24% above the initial conversion price.

However, at the final terms the implied volatility worked out at 27%, suggesting the deal wasn’t that cheap. As with many other Korean CBs, the bonds also cannot be converted for the first 12 months. The 180-day historic volatility is about 37%.

The deal was comfortably covered, according to a source, although notably the bookrunners didn’t immediately exercise the $50 million upsize option. In terms of volume, the majority of the demand came from outright investors in Europe, although looking at the number of orders, hedge funds outweighed outrights by about three to two — even though there was only a small amount of borrow available in the market. In all, close to 60 investors submitted orders.

Hanjin doesn’t have any outstanding bonds and aside from a convertible bond issued by fellow Korean container and bulk shipping company STX Pan Ocean, which has only about one-and-a-half years left until maturity and is quite illiquid, there weren’t really any peers to value it against. STX Pan Ocean’s CB is trading at a spread over Libor of about 850bp.

Most investors were said to have used a credit spread of about 650bp to 700bp and the implied vol of 27% is based on the wide end of that range, and a stock borrow cost of 5%. Even though there was a small number of shares available for lending in the market, the cost was said to be relatively high at 4%. The bond floor worked out at 90%.

Investors will get compensated for all dividends.

Hanjin didn’t specify any use of proceeds, saying only that the money will go towards general corporate purposes. However, it says on its website that it will continue to enlarge its fleet and acquire more terminals as it pursues its goal of becoming a “global logistics leader”. The company currently has about 200 ships and 13 terminals around the world.