After two months with no issuance at all, the convertible bond market in Asia has bounced back to life with two deals in two days. After the $220 million zero-coupon, zero-yield CB by Asia Cement on Tuesday, Hong Kong-listed mining company China Daye Non-Ferrous Metals Mining hit the market last night with an Rmb820 million ($132 million) deal.
While the offering was well below the previous day’s trade in terms of size, the issuer is also significantly smaller with a market capitalisation just above $500 million. To help get the deal done and improve the terms, the CB comes with a stand-by letter of credit from the Macau branch of Bank of China, meaning the pricing was based Bank of China’s single-A credit.
China Daye is 69% owned by state-owned Daye Non-Ferrous Metals Company, which is one of the top-five producers of raw aluminium in China. It was listed in Hong Kong through a reverse takeover that was completed early last year.
According to its website, it serves as a platform for Hubei-based Daye Non-Ferrous to tap the international capital markets. However, China Daye also owns eight copper, molybdenum and wolfram mines in Mongolia and in the Xinjiang Uyghur Autonomous Region of China. Aside from mining, it is also involved in the processing of mineral ores and trading of metal products in China. Its major products include copper cathodes, gold, silver, iron ores and sulphuric acid.
The company’s share price has been on a declining trend for the past couple of years and is down 26% so far this year. Interestingly, that means it is issuing the CB at a time when it is trading close to a two-year low. One source said the company was keen to complete the capital-raising before its annual general meeting on May 20 in order to make use of its existing mandate to issue new shares. If the CB is converted in full, the new shares will account for 19.8% of the China Daye’s existing share capital.
The bonds are denominated in renminbi, but settled in US dollars, making it the first such deal since Chaowei Power raised the equivalent of $100 million through a renminbi-denominated, US dollar settled CB in August last year. It comes on the back of a statement earlier this week that suggested Beijing is about to draw up a plan for how to make its currency fully convertible, which led to a renewed appetite for the renminbi.
The CB has a five-year maturity, but can be put back to the issuer after three years. The letter of credit has a tenor of three years and 30 days. There is also an issuer call after three years, subject to a 130% hurdle.
Thanks to the credit support, the deal came with a fixed coupon of 0.5% and was offered with a yield between 0.75% and 1.25%. The conversion premium was indicated at 28% to 33% over yesterday’s close of HK$0.234.
Sources said the deal attracted good demand and was about 2.5 times covered when it closed after just over two hours of bookbuilding. There was said to have been some price sensitivity, but the bookrunners were still able to fix the yield at the mid-point, at 1%.
The conversion premium was fixed at the investor friendly end, however, at 28.2%. The fact that it was slightly above the bottom of the range was to allow for a more even initial conversion price of HK$0.30.
Based on the information from various sources last night, the offering attracted between 30 and 40 investors with the demand slightly skewed towards hedge funds. Most of the buyers were based in Asia, but there was also some interest out of Europe, they said.
According to one source, the CB was marketed with a credit assumption of 125bp, based on the letter of credit, although another source said it was as high as 140bp. Either way, this seems to have triggered the interest of investors since the Bank of China’s credit default swaps are trading only at 50bp, suggesting there could be some upside in store.
But while the credit assumption may have been on the generous side, the rest of the terms were a bit more aggressive, particularly when considering that the stock isn’t eligible for short-selling and that the CB will convert into about 400 days of trading volume. However, the conversion price doesn’t look too daunting since the stock was trading above HK$0.30 until early February this year and should be in reach if the company is able to ramp up its production.
The conversion price will be adjusted for all dividends.
Based on the final terms and a credit assumption of 125bp, the bond floor worked out at about 95% and the implied volatility was about 25%, which compares with a historic vol of 30% to 35%.
CIMB and DBS were joint bookrunners for the transaction. DBS led a number of CBs last year that came with similar letters of credit and seems to have carved out a niche for itself in this area, although this is the first time that the credit-backing is provided by a third party, as opposed to by DBS itself.
Meanwhile, this is the first CB arranged by CIMB for a Hong Kong-listed Chinese company since its acquisition of RBS’s ECM business in the region last year.
