Pacific Basin raises $230 million from upsized CB

Pacific Basin Shipping has raised $230 million from a convertible bond that was well-received by the market, but at the same time provided cost-efficient financing for the company. Thanks to strong demand, the bookrunners were able to exercise the upsize option in full straight away, increasing the deal from the $200 million that was originally on offer. It was also priced at best terms for the issuer.

The dry-bulk shipper intends to use the proceeds to buy back an existing CB which becomes puttable in February next year and which currently trades out of the money. The new bond has a lower coupon and a one-year longer effective maturity versus the existing bond at launch and was able to achieve the same conversion premium.

Even so, investors took a liking to the deal and pushed the price to about 101.5 in the grey market shortly after launch, which added momentum to the bookbuild. Sources said the positive response was partly because investors were already familiar with the name, courtesy of the existing CB which was issued in December 2007 and that the stock is freely available to borrow, making it easy to hedge the equity option. Others argued that the pricing was also quite attractive (albeit not too cheap) -- perhaps a result of there being no need for a new name discount.

Either way, the deal offered some relief for CB investors who are hurting after the other Asian CBs that have come to market this year are trading below par. Ying Li International Real Estate, a Chinese property developer listed in Singapore, which sold the equivalent of $142 million worth of Singapore dollar-denominated CBs in late January, has had a particularly tough time with the CB currently trading at about 90% of face value.

Notably this was the second new CB this week to trade up, with Vedanta quoted at about 101 at the end of its first day. The Indian metals and mining group sold an $805 million seven-year CB with two puts at years three and five during London trading on Tuesday -- the largest CB globally so far this year.

However, because it is listed in London, Vedanta is viewed as a European deal rather than an Asian one - not least because it has a completely different structure than other Indian CBs which are bound by numerous regulations -- and while there was some input from Asia, the deal was primarily led by London-based bankers at the four bookrunners. Still, Vedanta's deals are always watched in Asia and the fact that it too was reasonably priced should be supportive for the Asian market as well, CB specialists said.

The Pacific Basin bonds have a six-year maturity, but can be put back to the company at par at year four, and have a par in-par out structure, meaning the coupon and yield are the same. There is an issuer call after four years, subject to a 130% hurdle, and if fully converted, they will account for about 12.5% of the existing share capital.

The bonds were offered with a coupon between 1.75% and 2.25% and a conversion premium between 22% and 27% over yesterday's closing price of HK$6.28. The coupon was fixed at 1.75%, offering significant a saving versus the company's existing CB, which pays a coupon of 3.3%. That bond was issued in 2007 at a size of $390 million, but after an earlier buyback exercise, it currently has about $314 million outstanding.

The premium was set at 27%, giving an initial conversion price of approximately HK$7.98 -- a level where the share price last traded in September 2008 when it was on the way down as the financial crisis sparked a liquidity crunch that was severely damaging to trade of all sorts. Like the global stockmarkets in general, Pacific Basin has been on a rebound since early March 2009 and, in the past 12 months, it has gained 104%.

However, in connection with the release of its 2009 earnings on Tuesday this week, the company management expressed some optimism about the year ahead, saying its outlook has changed to neutral from negative. It also said that it plans to use some of its cash holdings ($1.1 billion at the end of last year) to expand its fleet amid increasing demand for dry-bulk shipping services and falling vessel prices. Pacific Basin is a key beneficiary of the import for commodities such as iron ore and coal to China. In other words, there is definitely scope for the share price to move higher.

There was no information last night about the size of the order book, except unconfirmed talk that the demand had been "overwhelming", but one source said more than 200 investors bought into the deal. About two-thirds of the demand came from Europe, with the remaining one-third generated out of accounts based in Asia.

The CB was marketed by the bookrunners at a credit spread of 500bp over Libor, based partly on the company's exiting CB, which with a year left before becoming puttable, was trading at a spread of 325bp, partly due to the fact that the STX Pan-Ocean CB that was issued in November last year and has five-put-three structure, came (and still trades) at a credit spread of 600bp.

Other assumptions included a stock borrow cost of 100bp and a full dividend pass-through. This, according to sources, gave a bond floor of 81.4% and an implied volatility of 33%. Both stand out versus the other five Asian issuers this year, which have come with implied vols in the twenties and bond floors of 85% and above.

The deal was arranged by Goldman Sachs and HSBC. Goldman has a long-term relationship with Pacific Basin and arranged both its IPO in 2004 and the previous CB in 2007. However, the US investment bank was left out when the shipping company raised $98 million from a new share placement in May last year, and would have been relieved to be back in the line-up for this deal. Last year's placement was arranged by UBS on a sole basis. 

The Vedanta CB, which was priced with a 4% coupon and a 37.5% conversion premium, was arranged by Goldman Sachs, J.P. Morgan, Morgan Stanley and UBS.