The CB, which was arranged by Deutsche Bank, wasnÆt without controversy, however, as the original yield had to be doubled before investors agreed to commit to the offering.
This was the first CB of size to be launched in the international market since Bumi Resources had to withdraw a $300 million offering a week earlier after investors found the terms too aggressive, and while the NWCL deal didnÆt fare as badly, the re-pricing does suggest that there is currently a gap between what CB issuers want and what investors are willing to pay.
Earlier in the week, fellow Mainland developer Greentown China Holdings decided to hold off on plans to issue a CB after sources said the issuerÆs expectations of the terms had been a bit high. Greentown did go ahead with a $297 million placement (the two were to have been concurrent), which met with strong demand.
ôInvestors are becoming more selective as there is less scarcity of CBs these days, and we have to be flexible around that,ö says one CB banker.
However, the deals from both Bumi and NWCL do indicate that the intense competition for these deals is starting to push investment banks into accepting more and more aggressive terms.
The NWCL CB was offered with a yield between 0% and 0.375%, which would have put it slightly below the three-year renminbi swap rate at about 0.5%. After the upward adjustment, the final yield was fixed at 0.75%
The zero coupon bonds have a five-year maturity, but can be put back to the company on the third anniversary, giving them an effective life of three years. They were sold at face value after the re-pricing, but according to sources they were bid below par on Friday once the sale was completed. One trader was quoting prices as low as 98.75-99.125 in the late afternoon.
The deal included an upsize option of $39 million that may be used to help stabilise the price, and Deutsche Bank was actively making a market in the bonds after completion. Like with some other recent CB transactions, a slight rise in the share price after the deal could come to the rescue and push the CB price back to par, but NWCLÆs shares were suspended from trading on Friday, so any such help wonÆt be evident until today.
The bonds totalled Rmb2.5 billion and were offered with a conversion premium of 40% to 50% over the volume-weighted average price on Thursday, which amounted to HK$5.7459. The premium was fixed at 40% for an initial conversion price of HK$8.044 per share. Given that the share price rallied 5.5% to HK$5.91 on Thursday, the conversion premium in relation to the close is only 36%, however.
But with the share price having rallied 53% in the past two months, the conversion premium can still be regarded as a good deal for the company.
The weak interest at the original terms was evident by the fact that the deal was kept open until almost 7am Hong Kong time Friday after being launched just before 9pm the previous night. But after the re-pricing, demand was said to have picked up with about 40 to 50 accounts submitting orders. One source said the size of individual orders wasnÆt massive, but the accounts that came in were of high quality.
The underlying assumptions included a credit spread of 200 basis points û a level at which Deutsche Bank was said to have provided $100 million worth of credit default swaps. The spread was based on the companyÆs borrowings in the syndicated loan market at 80 basis points. The stock borrowing cost was assumed at 5% as there is very limited lending available in the stock and there is a full divided protection for the bond holders.
This gave a bond floor of 94.8% and a 28% implied volatility. The latter came at a sizeable discount to the 100-day volatility at close to 40%. But with little stock borrow available, few investors would have looked at the bonds as a volatility play.
Like with most other developers in China, the bulk of investors would have been more interested in the bonds as an outright investment in the equity story, as strong economic growth is expected to translate into continued bottom line upside for the sector.
Some comments were also made about the bond floor being a bit too low in relation to the high conversion premium as it sets the cost for the equity option at more than five basis points over three years.
NWCL said it intends to use all of the net proceeds to finance the development costs of a property project in Beijing and for general working capital.
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