Mingfa completes $200 million CB on second attempt

Chinese property developer Mingfa Group (International) on Monday night returned to the market with a revamped version of the five-year Hong Kong dollar-denominated convertible bond that it pulled at the end of January, and this time it was more successful.

Indeed, the Hong Kong-listed company was able to raise the full HK$1.56 billion ($200 million) that it aimed for. Last time sources said there wasn’t sufficient demand to exercise the $50 million upsize option, which would have resulted in a deal of just $150 million. And rather than go along with the smaller size, Mingfa chose to cancel the deal and try again later.

In return for the larger deal size, the company offered an additional 75bp on both the coupon and the yield, although sources said the terms also needed to widen to account for the fact that interest rates have risen and spreads widened since Mingfa was in the market on January 31. A clear sign of this was that fellow Chinese property company Powerlong’s outstanding high-yield bonds had widened about 100bp and were now indicating a credit spread of 1,100bp, compared with 1,000bp in January.

The coupon and yield were both fixed at launch at 5.25% and 9.5%, respectively, which compared with a fixed coupon of 4.5% and a yield range of 7.75% to 8.75% in January.

The conversion premium was offered in a range between 20% and 25% over Monday’s close of HK$2.64 and fixed at the bottom. This was not too dissimilar to last time when the premium was indicated at 20.36% to 30%. However, the reference price for the January deal was the five-day volume-weighted average price, which meant the conversion premium over the latest close was only 17.3% at the investor-friendly end of the range.

The share price is slightly lower now than it was at the end of January and, as a result, the initial conversion price of about HK$3.168 that was achieved through this latest deal is 1 HK cent below what the company would have gotten had it decided to go ahead with a smaller deal at the investor-friendly end of terms in January. Sources said at the time that there was sufficient demand to complete the deal at those terms. However, people familiar with the deal process have argued that the terms that went out to investors in January were less aggressive than those that were initially shown to the company, which may explain why Mingfa chose not to go ahead despite having a fully covered deal.

Otherwise, the deal structure was largely the same as last time with a parity reset on March 10, 2012 (subject to a 75% floor), and a put option that kicks in shortly after the second anniversary – before the put on an outstanding CB due in 2015 that was issued to Warburg Pincus in November. If the latter hadn’t been the case, the new CB would have been structurally subordinate to the bonds held by Warburg Pincus, which would not have gone down well with investors.

The investor-friendly features were deemed necessary to counter the fact that neither the credit nor the equity option can be hedged, that Mingfa is not a particularly liquid stock and that the share price had risen only 10.5% since the initial public offering in November 2009. Investors also remain cautious about Chinese property counters in general as the People’s Bank of China is expected to continue to raise interest rates.

The CB also comes with a mandatory conversion after two years, although the 142% hurdle is slightly more aggressive than the 150% used in January.

HSBC, which arranged the January deal together with UBS, was still on the ticket for the re-launched deal, while UBS was replaced by Morgan Stanley.

To ensure the deal would be successful, the two bookrunners had pre-sounded the market and, according to sources, virtually the entire deal was covered by a shadow book at launch. However, that almost wasn’t enough. The launch got delayed until about 8.45pm Hong Kong time as other banks tried to get on the deal by showing the issuer more aggressive terms, which meant the term sheet was sent to investors just before Standard & Poor’s announced that it had revised its ratings outlook on the US from stable to negative.

The news spooked the market and the Dow Jones Industrial Average index plummeted 1.4% immediately at opening. But after the initial panic, most of the investors who had committed to the Mingfa CB before the S&P announcement stuck with the deal even though they realised that there would likely be downward pressure on both the equity and the CB in the Asian trading session yesterday.

When the bookbuilding closed after about three hours, the deal was around 1.5 times covered with orders from about 35 investors. As can be expected for a deal that cannot be hedged, the buyers were primarily outright investors and the majority were based in Europe. This was largely the case on the first attempt as well.

The CB did open below par, at about 99.5 and then drifted lower to around 99-100 as the share price fell 3.8%, market participants said. Some of the initial buyers did add to their holdings at that those levels and the bookrunners were seen to support the issue with active buying. This kept the price from falling below 99 as many of the initial buyers held on to the bonds they bought on Monday, as evidenced by the thin trading volume.  

Assuming a credit spread of 1,100bp, a 5% stock borrow cost and dividend protection above a 3% yield, the bond floor came out at about 95.5% and the implied volatility at around 20%. However, given the outright nature of the buyers, the valuations were not a key focus.

Mingfa will use the proceeds for land acquisitions and general corporate purposes.