Pricing of a HK$1.5 billion ($193 million) convertible has been described as cheap but fair by most market participants and as a result, barely moved from par right through the grey to secondary market trading yesterday (Tuesday).
Lead manager Merrill Lynch was felt to have a relatively difficult job on its hands putting together a transaction which would not prove too costly for the company and yet investors would still buy when they had a much stronger credit to choose from in Hang Lung Properties, whose HK$2 billion deal has also performed extremely since its launch in early March.
Terms subsequently comprised a five-year final maturity, coupon of 3.75%, yield of 4.75% and conversion premium of 18.2% to a volume weighted average, or 15% to a spot price of HK$3.475. There is also hard no call for two-years, thereafter subject to a 115% hurdle, three-year put at 103.184% and redemption at 105.570%. The deal can further be increased by HK$375 million.
Underlying assumptions comprise a bond floor of 93.4%, theoretical value of 108% and implied volatility of 18%. This is based on a conservative credit spread assumption of 275bp over Hibor (250bp mid range in the asset swap market), stock borrow cost of 400bp, dividend yield of 1.27% and volatility assumption of 35%. Historic volatility also stands at 35%.
By contrast, Hang Lung Properties' five put three deal was offering the twin attractions of a lower conversion premium (7.6%) and more defensive bond floor (94.69%) in the secondary market. To compensate, Sino Land has priced in a higher coupon to Hang Lung's 3.4% level and has premium redemption to its counterpart's par redemption.
The new deal also yields 1.09% more than Hang Lung's 3.66% secondary market level and incorporates a greater volatility play since the differential on the new deal is 17 points against 9.65 points on the outstanding offering, currently trading on implied volatility of 24.35%.
But whereas Hang Lung Properties is currently bid at 110bp over Hibor in the asset swap market and has an implied credit rating at the top end of the BBB spectrum, Sino Land is quoted over 150bp wider and has an implied credit rating at the bottom of the BB spectrum. The new convertible bond is also structurally subordinate to Sino Land's HK$9.6 billion ($1.23 billion) debt load, the majority of which is secured.
And while the group has a reasonable debt to capitalization ratio of 25%, its debt to EBITDA ratio of roughly seven times 2002 earnings and net interest coverage ratio of 1.6 times, are exceptionally weak even by BB standards.
As one convertible expert comments, "Until the recent rally in property stocks, it would have been very difficult to do a deal for Sino Land. This is a true high yield deal. Banks have been looking at ways to finance the company for some time, but Merrill's got there first."
A second adds, "Because the Hang Lung deal has performed so well, it created the kind of psychological momentum which Sino Land could exploit. It was a good time to launch a deal."
Lead bankers report an order book of 87 investors, with a geographical split of 40% Asia, 35% Europe and 25% US. The book was also said to have closed 3.5 times covered after a six-hour marketing period.
For Sino Land, a convertible was said to have made more sense than straight equity. The company is currently trading at a steep discount of 41% to NAV, near the bottom of its sector where only New World Development is trading wider at 48%.
However, since the beginning of March, the stock has been on a constant up-tick rising almost 30% in the space of two months and many analysts have now assigned a sell recommendation on the basis that the rally has overshot itself.
As one analyst explains, "A lot of foreign money has been flowing into more liquid markets like Hong Kong and property has been one of the chief beneficiaries. There's a perception that asset prices have bottomed on the residential side and that overall, the sector has lagged the rest of the market."
With a land bank of 14.8 million square feet at the end of 2001, Sino Land had a balanced portfolio of which 38% comprised commercial, 33% residential, 15% industrial, 10% car parks and 4% hotels (the Conrad). It also had 14 projects under development with a gross floor area of 3.1 million square feet and four-year completion period.
