HKEx sells $1 billion of equity

Hong Kong Exchanges and Clearing (HKEx) returned to the capital markets last night to raise $1 billion through a follow-on share placement that was upsized by 25%.

Like the $500 million that it raised through a convertible bond in September, the money will be used to part-fund its £1.4 billion ($2.2 billion) acquisition of the London Metal Exchange (LME) that was announced in June.

The deal was launched shortly after the UK regulators approved the acquisition yesterday afternoon. The market had been expecting an equity fund-raising some time after the UK decision and the fact that it came immediately afterwards shows that the HKEx was keen not to have the pending deal act as an overhang on the share price.

Sure, the stock is up compared to where it was when the HKEx announced the LME acquisition five months ago and it has risen 23% since it started to push higher in early September on the back of gains in the Hong Kong stock market. As the operator of the Hong Kong stock and futures exchanges, the HKEx’s earnings are directly related to what goes on in the local market, particularly the level of trading volumes and fund-raising activity.

But, according to sources, market players have built up a large short position in the name. The three bookrunners, which were the same banks as arranged the CB, had also received some reverse inquiries in the past few weeks from investors who were interested in participating in the pending share issuance.

So, it was perhaps not too surprising that there was strong demand for the placement. Sources said the order book built quite quickly after the deal was launched at around 5pm Hong Kong time and when it closed at 9:30pm, it was multiple times covered.

This allowed the bookrunners to go out with a message halfway through the evening that the deal size would be increased to $1 billion from $800 million. (The offering was marketed with an absolute size in dollars, rather than a specific number of shares.) At the same time they told the market that the price would be fixed around the mid-point of the range.

In the end the shares were priced just above the mid-point at HK$118, which translated into a 5.4% discount versus yesterday’s closing price. The shares were marketed in a range between HK$116.10 and HK$119, or at a discount of 4.6% to 7%.

At the final price, the HKEx ended up selling 65.705 million new shares, which accounted for 6.1% of the existing share capital and about 15 days of trading volume, based on the daily average in the past month.

The deal attracted more than 180 investors, although the sources noted that allocations were concentrated towards the largest orders. The buyers included both existing shareholders and new investors and were said to comprise a good mix of global long-only investors and hedge funds, as well as wealth management accounts and some high-net-worth retail investors. Overall, the quality of the order book was said to be high.

Having raised a combined $1.5 billion from the equity capital markets in just over two months (including the $500 million CB), the HKEx has now committed not to issue any new shares in the next three months. In fact, unless it makes another major acquisition the company is unlikely to return to the market any time soon. The HKEx’s business generates a lot of cash and the recent two deals mark the first time it has tapped the capital markets — for equity or debt — since it became a public listed company in 2000.

The CB, which is the largest convertible bond sold into the public markets in Asia ex-Japan this year, has a five-year maturity and no investor put option. However, it does come with a short issuer call after two years, subject to the usual 130% hurdle, to give the issuer a bit more flexibility than if it had issued a straight bond. It also has a second call feature that allows the HKEx to redeem the CB at a price of 101 if the LME acquisition isn’t completed by April 23 next year — although it now looks highly unlikely that this will be triggered.

The CB has a 0.5% coupon and was priced with a 1% yield-to-maturity and a conversion premium of 34.57% over the closing price of HK$118.90 on the deal of issuance, resulting in an initial conversion price of HK$160 per share. The conversion premium has since shrunk to 28.2%.

The CB too was highly sought after and it too was upsized by 25% to from an initial deal size of $400 million.

In a statement issued yesterday afternoon, the HKEx said that the UK’s Financial Services Authority has approved the LME acquisition by way of a scheme of arrangement and a capital reduction. The next step in the process of getting the deal across the line is a hearing of the petition to the High Court of England and Wales to sanction the scheme of arrangement and confirm the related capital reduction of the LME. This is expected to happen on December 5.

Assuming it will get that sanction, the scheme of arrangement is expected to become unconditional and effective on or around December 6, the HKEx said. This means the transaction, which marks the HKEx’s first real foray into commodities trading, should close before the end of the year as scheduled.

“The acquisition of LME Holdings represents a unique opportunity for us to acquire in one stroke a position of global leadership in the commodities market,” Charles Li, the CEO of HKEx, said when the deal was announced in June. “This is consistent with our strategy to expand beyond equities and equity derivatives and offers significant opportunities for revenue growth. HKEx brings a unique ability to help the LME grow its business in Asia and, particularly, China and we will capitalise on this to deliver value for all our stakeholders.”

Deutsche Bank, HSBC and UBS were joint bookrunners for the placement, with Deutsche and UBS playing a more active role in building the book.