Sina Corp, the Nasdaq-listed Chinese online media company, raised $700 million from the sale of convertible bonds on Friday, making it the fourth internet-focused Chinese company to tap the US equity-linked market since late August.
The deal, which has a five-year maturity and comes with a three-year put option, was timed to take advantage of a positive market response to Sina’s third-quarter earnings and attracted a lot of demand from investors both in the US and Asia. This allowed the company to upsize the deal from an initial $600 million plus a $90 million greenshoe to $700 million plus a $100 million greenshoe.
The shoe can be exercised within the next 30 days. If it is, the size of the Sina CB will match the $800 million raised by online Chinese travel agent Ctrip.com in mid-October.
The price was also fixed at best terms for the issuer. Notably the conversion premium was set at 45% over Thursday’s closing price, and that was after the share price rose slightly during the 24-hour marketing period. The premium is the highest among the four Chinese issuers that have tapped the US CB market recently and could be the highest ever for a US-listed Chinese company, according to a banker.
The success of the Sina CB was in sharp contrast to a separate deal by YY, a Chinese provider of an online social platform, which is also listed on Nasdaq. The company launched a $250 million CB with a $50 million greenshoe at about 8am New York time on Thursday (9pm Hong Kong time), which meant its marketing period overlapped with the Sina CB, which had launched after the US market closed on Wednesday.
Terms for the two deals were very similar which raised some eyebrows early on, given that Sina’s market capitalisation of $5.7 billion is almost twice that of YY’s. It also has a significantly longer track-record and operates China’s most popular micro-blogging service, Weibo.com, which has more than 500 million users.
Sina listed in the US in 2000 and issued a convertible bond in 2003, making it a familiar name to many investors. By comparison, YY listed in the US in November 2012 and this is its first follow-on issue since then.
According to sources, the YY CB struggled from the beginning, never gaining the traction that the Sina offering did. By about 4am Hong Kong time on Friday, Citi and JP Morgan, which were joint bookrunners for the YY deal, decided to increase the coupon to 2.375% from the initial range of 1.125% to 1.875%, and to fix the conversion premium at the low end of the 40% to 45% range.
At the same time, they re-offered the deal at a price of 99, essentially sacrificing part of their fee to make the deal even more attractive to investors. It was the first CB by an Asian issuer to be re-offered below par this year
Even that wasn’t enough to tempt investors though, and early Friday evening Hong Kong time, the deal was pulled.
According to a source, there was sufficient demand to allocate the $250 million base deal, but not enough to also cover the greenshoe. And since the bookrunners did not want to go ahead without a shoe as that would reduce their ability to help stabilise the CB in the aftermarket, they proposed a smaller $200 million transaction with a $50 million greenshoe.
Having already agreed to raise the coupon, YY did not want to compromise on the deal size as well and chose to cancel the deal instead.
Some observers said the cancellation suggested there may be some fatigue among US investors after more than $2.2 billion worth of CB issuance by Chinese internet companies since Qihoo 360 Technology hit the market with a $600 million deal in late August. However, the failure of the YY CB does seem to have had more to do with the aggressive terms and the decision to go head-to-head with Sina without offering investors proper compensation for what was widely viewed as a risker deal.
Indeed, the talk of potential market fatigue appeared to have little bearing when considering the fact that Sina raised the same amount as Ctrip pre-greenshoe and was also able to achieve better terms – even though it was the fourth Chinese internet company to come to market in a short space of time.
Sina’s terms and valuation
The Sina CB was priced with a coupon and yield of 1%, which was at the low end of the 1%-1.5% offering range. And, as mentioned, the conversion premium was set at 45% over Thursday’s closing price of $85.31, resulting in a conversion price of about $123.70. The stock last traded about $100 in September 2011, so this is a good outcome for the company.
By comparison, Ctrip priced its CB with a 1.25% coupon and a 42.5% conversion premium. At the time of its deal in mid-October, bankers said this was the highest premium achieved by a US-listed Chinese issuer since 2007. The deal, which was arranged by JP Morgan, had the same five-put-three structure as the Sina offering and has traded up to about 103-104 since the issue, one CB specialist said. It too came with a base size of $700 million (upsized from $500 million initially) and a $100 million greenshoe, which was exercised after the first day of trading.
Sina issued the CB on the back of a 70% gain in the share price so far this year, including an 11.4% rally on Wednesday last week after its third-quarter earnings report. The stock rose a further 0.9% on Thursday while the CB was in the market. The latter was particularly notable since share prices tend to fall when a company is looking to issue CBs as investors digest the potential dilution.
YY’s share price fell 2.4% during the marketing of its CB on the same day.
Sina said it would use $100 million of the CB proceeds to buy back its own shares, which may have helped to support the stock to some extent.
As is usually the case in the US, the CB had a par in-par out structure, which means the coupon and the yield were the same. It also has no issuer call, which is common for US CBs.
The bonds were marketed at a credit spread of 400bp over Libor and a stock borrow cost of 25bp. It also came with a full dividend protection. This resulted in a bond floor of about 88.6% and a theoretical value of 102-103, according to a source.
The source said the deal attracted a lot of demand among Asia-based investors who are very familiar with the name and the order book was well covered even before US investors got a chance to look at the transaction on Thursday. This created a lot of momentum and suggested that the decision to actively market the deal in Asia first was the right strategy.
By comparison, YY chose to market the deal to US investors first and when Asian investors realised that there was little demand from them, they mostly chose to stay away as well.
The demand for the Sina deal was split roughly half and half between outright investors and hedge funds and about 80 accounts participated in the transaction, the source said.
Aside from the share buy-back, Sina said it will use the rest of the proceeds for general corporate purposes, including potential acquisitions of complementary businesses.
The Sina CB was arranged by Goldman Sachs on a sole basis.
The YY CB
YY describes itself as a communication social platform that engages users in real-time online group activities, such as video games, karaoke, music concerts, education, live shows and conference calls, through a combination of voice, text and video.
Its share price has had a good run since the $82 million IPO in November last year and, by the time the CB launched in New York on Thursday morning last week, the stock was up 414%. As noted, it fell 2.4% on Thursday, but rebounded by 2.8% in US trading on Friday after the CB was pulled, finishing the week at $54.14.
Like the Sina deal, the YY CB had a five-year maturity, a three-year investor put and no issuer call. The use of proceeds were also similar, with YY saying that it would use $50 million for share buy-backs and the rest for general corporate purposes, including working capital needs and potential acquisitions of complementary businesses.
According to a press release, the company also planned to enter into what it called “capped call transactions”. This is essentially the same as a call-spread overlay, which enables the issuer to effectively increase the conversion premium on a CB by buying a call option with a strike price corresponding to the initial conversion price from the bookrunners, while simultaneously selling them a call option with a higher strike price.
In addition to raising the premium for the issuer (but not for the investors), the capped call transaction helps to reduce the potential dilution if the CB is converted into equity. As the bookrunners have to buy shares in the market to hedge their position, this type of transaction can also help provide support for the stock immediately after the deal.
