Singapore listed Hongkong Land Holdings raised $400 million from a convertible on Tuesday (December 6). The JPMorgan and UBS led deal drew a strong response, which led to an increase in the issue size and an upward revision of terms.
The deal size was increased from $350 million to $400 million and the coupon priced at 2.75% after being marketed on a range of 3% to 3.5%. The seven-year non puttable deal has an issue and redemption price of par.
It also has a conversion premium of 20.3% to the group's spot close on Tuesday and is callable after five years and two weeks subject to a 130% hurdle.
Underlying assumptions comprise a bond floor of 83.4%, an implied volatility of 30.4% and theoretical value of par. This is based on a credit spread of 60bp over Libor, 2% borrow cost, 2.5% dividend yield and 100-day volatility of 30.4%.
The order book is said to have closed at just under 10 times covered, although the figure is not that meaningful given orders were capped at 10%. This presented an allocation challenge for the leads and the deal was not finally priced until 4am Hong Kong time after closing at 9pm. About 140 accounts placed orders.
Specialists report little asset swap activity and say most accounts were keen to hold the paper on an outright basis. The stock also held up fairly well yesterday despite the availability of borrow and the large size of the deal.
It traded down 1.8% on the day to $3.14. Trading activity, however, was up eightfold to $50 million and specialists believe a number of institutions took the opportunity to buy the stock at a discounted price.
They conclude that it was well received because of the rarity value of the name and strength of the underlying credit. "It's not often you see a deal of this quality in the Asian CB market," one observer comments.
He adds that accounts appear to be sitting on large amounts of cash, which they will put back to work if the credit and terms are right. "Frankly we were quite surprised to see how much money there was out there," he notes. "The markets are extremely liquid right now."
Investors are also said to have liked the cash coupon. Hongkong Land chose a seven-year maturity for cost reasons.
"There's probably about 5bp on the yield curve and 10bp on the credit curve between five and seven years," says one observer. "Paying up 1/8th to get an additional two years in an interest rate environment like this, made a lot of sense."
Hongkong Land is currently rated BBB+/A3. However, Moody's put the group on review for possible downgrade the night the deal was priced. It said it was doing so because of the large number of investments that have been made over the past year.
Having previously been valued as a stable property investor, the group is now being re-rated after adding development risk to its balance sheet. Hongkong Land currently holds a portfolio of five million square feet of office and retail space in Hong Kong.
It is 45% owned by Jardine Strategic, which is in turn 79% owned by Bermuda-based conglomerate Jardine Matheson.
