The Deutsche Bank-led transaction was the second CB issued by a Hong Kong-listed company last week and the largest since property developer Neo-China sold HK$1.34 billion of CBs on May 12 just as the equity market correction got under way. On Wednesday last week Shui On Construction and Materials raised HK$930 million from a three-year CB arranged by JPMorgan.
The sizes of last weekÆs issues show some degree of confidence is returning to the CB market, although SinochemÆs bonds were priced at the cheap end of the indicated ranges, both with regard to the yield and the conversion premium.
The producer of fertilizer products, was, however, able to make use of a HK$300 million option to increase the issue from the base size of HK1 billion, which was testament to the demand being quite healthy. According to a market participant, the bonds were also trading just above par on Friday.
The company launched the offering Thursday night after its share price gained 3.6% during trading that day and completed it Friday while the shares were suspended from trading. One source noted that the run-up in the share price contributed to the conversion premium being fixed at the tight end.
However, Sinochem, which gained a Hong Kong listing in July 2005 following a reverse takeover, saw a massive rally in its share price in the six months starting from October last year, gaining 197% to a high of HK$3.60 in April. And even though they have corrected since then, the shares are still up 98% year to date, making it only natural for some investors to hesitate about a high premium.
And perhaps the low-end pricing was the price the company had to pay to raise the money now rather than wait until investors get back from holiday in September. The danger of holding off û as many other issuers in the pipeline have decided to do û is of course that there is no telling whether the underlying equity market will be any better six weeks from now.
The five year bonds will pay no coupon, but will redeem at 127.23% for a yield to maturity of 4.875% - at the top end of an indicated range that started at 3.875%. Investors can put the bonds back to the issuer after three years at 115.55% to get the same yield. There is also an issuer call after three years, subject to a 130% hurdle.
The conversion price was fixed at HK$3.74, which marked a 30% premium to ThursdayÆs closing price of HK$2.875. The bonds were initially offered with a conversion premium range of 30% to 35%.
The bond floor was set at 94% and the implied volatility at about 26%, which compares with a 100-day historic volatility of 63%. Looking at the slightly longer perspective, the 260-day volatility is about 49%.
The assumptions included a credit spread of 200 basis points over Hibor. Deutsche Bank was said to have provided asset swaps for about 35% of the base size at this level, with most of it taken up by investors. The bonds carry a full dividend protection and the stock borrow cost was assumed at 5% and it is not possible to go short of the stock.
The buyers were believed to have been primarily Asian-based, which is not unusual for local currency-denominated issues, with some European accounts also participating.
Despite the still volatile markets, it is possible to do trades ôbut you have to be selective about when you come to market,ö says one observer. ôSinochem seems to have managed to place this issue at the right time and interest was further helped by the fact that there hasnÆt been much issuance lately.ö
Investors also ôlike the storyö with the company - being the largest importer of fertilizer into China as well as the largest distributor - seen as a play on the Chinese governmentÆs emphasis on rural development and its increasing support to the agricultural sector.
In 2005, Sinochem reported a 62.6% increase in revenues to HK$19.25 billion, which it said was backed by a 34% rise in fertilizer sales volumes and a 22% rise in selling prices. Net profit jumped 52.6% to HK$780 million.
Shui On ConstructionÆs bonds that were issued earlier in the week were priced with a yield of 5.875% and a conversion premium of 24%. They also carried an automatic conversion price reset on the first and second anniversaries as well as two months before the final maturity, subject to a floor of 72% of the initial conversion price.
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