According to sources, the decision to re-offer the bonds at 99.625% of face value, which would have eaten into the bookrunner's fees, was taken to prevent a further decline in the price as the bonds were already trading below par in the grey market. The re-offer came a couple of hours before the books closed and followed a full day of marketing.
Still, the company did achieve its target as the conversion premium was fixed at 51% above MondayÆs closing price of S$0.65 after being offered in a range between 50% and 55%. This marked the highest ever premium for a renminbi-denominated CB and also for a CB with an effective maturity of only three years. Other deals that have come with a premium above 50% have had maturities between four and 10 years.
Pine AgritechÆs zero-coupon bonds have a five-year maturity, but can be put back to the issuer after three years. There is also an issuer call after three years, subject to a 130% hurdle.
The yield was fixed at the wide end of the indicated 2.4% to 3.4% range which, based on the re-offer price, will give investors an actual yield to maturity of about 3.5%.
Even before the re-offer, the deal was more than two times subscribed, however, and it ended up 2.5 times covered with between 45 and 50 participating investors, one source says.
The company offered Rmb2 billion ($263 million) worth of US dollar-settled CBs with a Rmb300 million ($40 million) upsize option that hadnÆt been exercised as of last night. If fully converted, the company will have to issue new shares corresponding to about 13%-14% of its current outstanding share capital. UBS was the sole bookrunner for the offering.
Aside from the high premium, some investors were also said to have taken issue with the credit assumption at Libor plus 250 basis points, where UBS was said to have offered asset swaps for one-third of the deal. The credit assumptions didnÆt differ too much, however, and those who felt 275 basis points above Libor to be a more appropriate level would essentially have been satisfied with the higher yield provided through the re-offer.
Based on a 5% stock borrow cost and a dividend yield of 2.5%, the bond floor came out at 97%, which meant investors who were comfortable with the equity story were quite happy to buy the bonds on an outright basis. About 40% of the demand came from outright investors, while arbitrage accounts and hedge funds made up the remaining 60%.
The implied volatility was 29%, compared with a 100-day volatility at 36% and the 260-day at 43%. The companyÆs share price has risen about 24% so far this year, compared with an 18% gain in the Singapore benchmark index. The stock was suspended yesterday to complete the CB transaction.
A contributing reason to why investors were uneasy about the high conversion premium could be that Gome Electrical Appliances, whose 50% premium was previously the highest for a renminbi-denominated CB, has struggled ever since it came to market in mid-May. Yesterday it was trading at 93%.
ôGome is a company that everybody knows and that has a transparent credit. By comparison, Pine Agritech is not well researched, has no stock lending what-so-ever and is an unknown credit. Put in this perspective, a 51% premium is an achievement,ö one observer says.
Gome issued $600 million worth of renminbi-denominated zero-coupon CBs with a seven-year maturity and two put options at years three and five. The bonds were sold together with a concurrent top-up share placement that saw the company raise a total of $942 million.
CB investors were starting to show signs of being less keen on very high premiums towards the end of a very busy issuance period in April and May. At that time premiums above 40% were becoming the norm and premiums above 50% were getting increasingly common. According to bankers the resistance grew as several other CBs (apart from Gome) also fell below par in the aftermarket.
There have been no CBs of size by Chinese issuers since late May, which may explain why Pine Agritech was still able to get away with another high-premium deal.
The company was seeking funds to expand its business to keep up with its current strong order momentum, which is expected to continue for the next couple of years. According to a research report by BNP Paribas, potential sales revenues from the companyÆs new soybean peptide product has yet to be factored into the share price, but should emerge as a ôsignificant earnings contributorö in 2008-2009. Soybean petide is a product that helps the body to regain energy quickly and is also seen to slow down the accumulation of fat, according to an industry website.
The announcement of customers for this new product will now be delayed until the fourth quarter, however, as one of ChinaÆs largest dairy companies recently requested a study on the benefits of the new product, which is expected to take three months to complete.
BNP has a buy rating on the stock and a target price of S$0.92, implying 41% upside from current levels in the next 12 months.
¬ Haymarket Media Limited. All rights reserved.
