Chinese property developer Mingfa Group (International) was in the market on Monday night with a $150 million Hong Kong dollar-denominated convertible bond that would have brought the total number of Asian equity-linked transactions in January to five. However, shortly after 3am yesterday morning (Hong Kong time) joint bookrunners HSBC and UBS informed investors that the deal had been postponed.
The announcement came as a bit of a surprise since the order books had closed around 11pm with sufficient demand to cover the transaction at the investor-friendly end of the terms. But according to sources, the company subsequently decided that it didn’t want to issue the CB at those terms, hoping perhaps that the nervousness in the market caused by the protests in Egypt will die down and leave investors more receptive to a high-yield offering after the Lunar New Year holidays. The company was to have used the money for land bank acquisitions and general corporate purposes.
Mingfa is the second company this year to pull a deal even though there was enough demand to go ahead. Earlier in January, Philippine conglomerate Filinvest Development Corp scrapped a fully-marketed follow-on share sale of between $276 million and $332 million as “the proposed offer price of the equity shares would not reflect the true value of the company.” Filinvest added that there was “ample demand” from investors for an offering to be completed.
This is a worrying trend as it suggests issuers are signing off on price ranges before launch that they are not actually committed to in full. It is of course understandable that issuers are hoping that the bookrunners will be able to push investors above the bottom end of the price range, or in the case of a CB, inside the investor-friendly end of the terms, but it sets a bad precedent when they don’t honour the pre-agreed ranges – however disappointed they may be with the final outcome.
For CBs in particular, this is an unusual development as terms are often set with the investor-friendly end being the level where the banks expect the trade to clear. If demand is strong enough they may be able to push the terms beyond that, but investors will routinely submit their orders at best-terms.
With regard to Mingfa, one source noted that the key issue wasn’t the actual terms, however, but the size of the deal. That suggests Mingfa had been hoping to exercise the $50 million upsize option as well, for a total deal size of about $200 million. According to sources, the demand wasn’t strong enough to do that – even at the wide end of terms.
The latter suggests that while the terms did look generous on paper – one research note estimated the theoretical value of the bond as high as 105 at the investor-friendly end of terms – they weren’t too generous. Indeed, the various means to boost the attractiveness of the deal seem to have been necessary to convince investors to commit. The fact that Mingfa is a Chinese property developer would have played a role, as investors remain cautious about that sector amid expectations of further interest rate hikes in China in the near term. The stock is also quite illiquid, the share price has gained only 13.4% since the initial public offering in November 2009, and the CB was unhedgeable.
The CB was clearly structured with that in mind. In addition to the 4.5% coupon (fixed at launch), it also offered an additional yield if the CB was not converted into equity and an automatic reset on March 10, 2012, if the share price was trading below the current reference price at that time. The reset down to the 30-day volume-weighted average price (VWAP) at that time was subject to a floor of HK$1.98, or 26.9% below Monday’s closing price.
The indicated yield ranged from 7.75% to 8.75% and the conversion premium was offered at between 20.36% and 30% over the five-day VWAP of HK$2.642. Since the share price had been trending upwards during that period, the premium over Monday’s HK$2.71 close would have been a slightly tighter 17.3% to 26.6%.
The CB had a five-year maturity and an unusual 2.5-year put to ensure that the bonds would rank pari passu to Mingfa’s outstanding HK$1.552 billion 5% CB due in 2015, which was issued to Warburg Pincus in November last year. That CB has a three-year put and if the new deal had come with a longer put, it would have been structurally subordinated to the bonds held by Warburg Pincus – something which is unlikely to have gone down well with investors.
The new CB also came with an issuer option to call for mandatory conversion after two-and-a-half years, subject to a 150% hurdle. The company offered HK$1.16 billion (approximately $150 million) worth of bonds plus an upsize option of HK$400 million (approximately $50 million). According to sources, the bookrunners were marketing the deal at a credit spread of 1,000bp over Hibor, although the analysts who came up with a theoretical value of 102.6-105 were using a slightly narrower spread of 900bp.
Given that it isn’t possible to hedge the CB – there are no stock borrow or asset swaps available in the market and the bookrunners didn’t provide any – most of the demand was said to have come from outright European investors. Some Hong Kong-based hedge funds and CB funds also participated. In all, about 30 investors submitted orders.
Mingfa’s share price edged up 1 HK cent to HK$2.72 yesterday after the CB was postponed.
