Hong Kong-listed Shanghai Industrial, a conglomerate backed by the Shanghai municipal government, last night raised HK$3.9 billion ($503 million) from a Hong Kong dollar-denominated convertible bond.
The deal launched just two hours after Lotte Shopping hit the market with Asia’s first equity-linked deal this year. At first glance this seemed a bit odd as there could be a risk that the two deals might cannibalise on each other’s demand. However, two of the bookrunners on Shanghai Industrial were also involved in the Lotte Shopping transaction and probably wouldn’t have launched both deals if they felt that was a big risk.
The Shanghai Industrial trade came on the back of a 2.8% gain in the share price yesterday, which took the stock very close to its 12-month high of HK$28.15 from late February last year, so from that perspective the timing was good. The share price has risen 39% from its 2012 low in June last year. A source also noted that there is a wide-spread expectation that there will be more CBs hitting the market over the next week, so waiting a day or two may not necessarily have been any better.
The two issuers are also quite different companies.
According to sources, Shanghai Industrial attracted more outright investors than Lotte Shopping, even though it too came with quite aggressive terms. However, it did offer a 1% yield and was priced with a very high bond floor of 97%, which would have increased the attraction. The sheer size of the deal in combination with the issuer’s good credit quality — like Lotte Shopping, this deal was marketed at a credit spread of 150bp — also drew investors.
But perhaps more importantly, sources say CB investors have been asking for deals with exposure to China’s real estate market as the sentiment for this sector has turned more bullish.
There are some outstanding deals, but new issuance has been slim in the past year as most Chinese property companies have preferred to raise capital in the international debt market. Shanghai Industrial is a conglomerate, but gets about 50% of its revenues from real estate. And being backed by the Shanghai municipal government, it is well placed to acquire land in one of the hottest real estate markets in China.
On the other hand, hedge funds were less interested, partly because Shanghai Industrial is a fairly illiquid stock with a turnover of only $4 million or so per day. That makes it harder (and potentially more costly) for hedge funds to put on, and get out of, stock positions to hedge the equity option on the CB.
However, hedge funds did participate and, according to one source, were responsible for two of the largest orders. The fact that the stock itself is illiquid was partly compensated by the fact that there is plenty of stock borrow available in the name at a price of just 40 to 50 basis points.
This deal too was offered slightly below par in the grey market while the deal was being marketed, although sources said there wasn’t much actual activity.
The CB was issued by an entity called Tong Jie, but is fully guaranteed by Shanghai Industrial. It has a five-year maturity, a three-year put and an issuer call after three years, subject to a 130% hurdle.
The deal came with a fixed zero percent coupon, but was marketed with a back-ended yield of between zero and 1%. The issuer also offered a conversion premium of between 30% and 38% over yesterday’s close of HK$27.95.
Both were fixed at the investor friendly end, resulting in a 1% yield and a 30% premium. The latter translated into a conversion price of HK$36.335 — a level that Shanghai Industrial hasn’t traded at since the fourth quarter of 2010.
According to sources, the deal was about 1.5 times covered and attracted close to 60 investors. The demand was heavily weighted towards Asia and Europe.
Based on the final terms, a credit spread of 150bp, a stock borrow cost of 50bp and dividend protection if the payout ratio exceeds 35%, the bond floor worked out at 97%. The implied volatility was about 20%, which compares with a historic vol of about 23%.
Because of the high bond floor, the deal has a much lower delta than a typical Asian CB, which means that investors who wish to hedge the equity option will need to sell fewer shares. That could help support the share price today. One source said the delta is only around 20%, compared with 40% to 50% normally.
Shanghai Industrial said it intends to use the proceeds for future capital expenditures and investments related to its infrastructure business. Aside from real estate and infrastructure, the company is also involved in cigarette manufacturing, Chinese medicine and health food, medical technology, packaging materials, printed products, and the manufacturing of commercial vehicles and auto parts.
Bank of America Merrill Lynch, Deutsche Bank and Goldman Sachs were joint bookrunners.
