Hong Kong’s Johnson Electric made its first venture into the capital markets in 20 years on Wednesday evening, raising $200 million through a convertible bond that investors snapped up in 90 minutes.
The company, which makes electric motors for everything from power steering to hairdryers, raised five-year money that pays investors a yield of 2.75% and converts to equity at a 37.5% premium to the closing share price on Wednesday of HK$7.46.
Sole bookrunner JP Morgan marketed the deal with a credit spread of 300bp and priced it at an implied volatility of 23%, which was just 2% inside the historical volatility of 25% and gave a bond floor of 90.5. Those are aggressive terms for a small, unrated company.
Other CB issuers this year such as ASM Pacific and Biostime have priced at higher credit spreads for shorter-dated three-year deals, suggesting investors were willing to see Johnson Electric as being close to investment grade.
The company is still relatively small for that status — it has a market capitalisation of $3.3 billion — but it has been in business in Hong Kong since 1959 and listed on the stock exchange 30 years ago. It has little debt and plenty of cash flow, plus a global customer base that continues to grow.
Or as one banker put it: “It’s not Chinese.”
As well as offering diversification, Johnson Electric benefited from the relatively weak supply from convertibles issuers. Deal activity has started to pick up since earnings season ended but no big deals have yet hit the market in Asia.
Companies have plenty of incentive to issue as interest rate hikes are predicted for later this year. Indeed, Johnson Electric chose the unusual five-put-seven structure because its main objective was to lock in low-cost funds for as long as possible.
T
he books opened at 6.30pm with a marketed yield of 1.75% to 2.75%, a coupon of 0.5% to 1% and a conversion premium of 35% to 40%. Stock slippage was assumed at 5%, which turned out to be accurate as the company’s share price slipped towards the HK$7 mark during morning trading.
Demand was strong even at those tight terms, with perhaps 60% of the orders coming from outright investors and 40% from hedge funds. That allowed the deal to be upsized from $150 million, with the bond pricing at the wide end of the range and the option pricing at the midpoint.
The availability of $130 million of stock borrow helped hedge funds into the deal, as liquidity in the stock is less than $2.5 million a day.
One convertibles specialist said the bonds opened trading at 100.5 and subsequently traded up slightly to 101.
