China Jinmao Holdings announced on Tuesday a partial tender offer for its outstanding $600 million issue of perpetual subordinated convertible securities to help rejig its capital structure and ultimately lower its borrowing costs.
The relatively debt-light, BBB-/BBB-/Baa3 rated property developer is offering to buy back the bonds at 108% of face value, representing a pickup of about 125 basis points over Tuesday’s closing price at 106.75.
The perpetual was issued in October 2010 when the company was known as Franshion Properties. It is one of only two outstanding perpetual convertible bonds in Asia ex-Japan besides Hong Kong-listed Shui On Development's $500 million hybrid issued in 2012.
The Jinmao bond was mainly sold six years ago to long-only equity funds and private-equity investors, who would have been inclined to seek a conversion into shares at some point rather than hold the bonds as pure income-generating instruments. But none of the bonds have been converted so far because the underlying stock has mostly traded below the HK$2.83 conversion price.
Jinmao's share price rose by 6% on Wednesday to close at HK$2.13 but is still 25% below the strike price.
Secondary trading of the bonds is limited by the fact it is not listed on any stock exchange, which means ownership can only change hands through over-the-counter transactions. Because they are perpetual bonds there is also no put option attached that bondholders can exercise and thereby trigger a sale back to the company.
As such, the buyback could be the only opportunity for bondholders to cash out their positions and at a premium to the market price, according to a source familiar with the situation.
Rationale
By retiring the bonds, Jinmao aims to reduce its financing costs and better use its balance sheet.
According to the terms of the perpetual, the company is required to pay an annual distribution of 6.8% while simultaneously bearing a share dilution risk if the bond is converted into shares.
However, with interest rates falling over the years the company can now raise funds more cheaply by selling straight debt. Even back in 2014, when Jinmao last issued debt, it was able to raise $500 million from a five-year dollar bond paying just 5.75% per annum.
Jinmao has one of the least leveraged balance sheets among Chinese property developers. Last year the company’s gearing ratio dropped to 51% from 56% a year earlier, while those of many of its rivals are mostly above 100%.
The low gearing, though, is partly because the perpetual bond is treated as equity on the company’s balance sheet.
In addition, the tender offer is also reasonable for Jinmao from a cash management perspective since the property developer had HK$13 billion ($1.7 billion) in cash as of the end of last year, which is more than half of its market capitalisation.
It remains to be seen how many bondholders subscribe to the tender offer given that they are unlikely to find many investment grade credits that yield 6.8% per year in the current low interest rate environment.
Still, this could be their last opportunity to cash out since Jinmao has said it currently has no intention to exercise the 110% issuer call. So if bondholders opt not to tender, the only option left would be a share conversion.
The buyback is being conducted via a partial tender offer, which means the issuer has sole discretion on how much it will buy back after the offer closes on June 7. Settlement for the tender offer is scheduled for June 14.
JP Morgan is the sole dealer manager of the tender offer.
