Sound Global opts for CB after Hong Kong listing is postponed

Sound Global, a Singapore-listed provider of water and wastewater treatment services in China, has raised Rmb680 million ($100 million) from the sale of convertible bonds and could pocket another Rmb205 million ($30 million) if an additional upsize option is also exercised.

The deal, which was launched and priced after the market closed on Thursday, comes after Sound Global cancelled an attempt to obtain a dual listing in Hong Kong in June because it could not be concluded “on acceptable terms”. The company was aiming to raise up to $187 million by selling new shares, but called off the offering the day the order books closed.

The CB has raised some of the funds targeted through the share sale, but the company said in an announcement to the Singapore Exchange earlier in the week that it is still pursuing its plans to list in Hong Kong. However, it added that such a listing may be undertaken by way of introduction, meaning it may list without selling any new shares. In any case, the company is prevented from issuing new shares for a period of 90-days following the CB, which has an expected issue date of September 15.

The company initially offered Rmb475 million worth of renminbi-denominated and US dollar-settled CBs with a Rmb205 million upsize option. But with the bonds being structured to appeal to both outright and hedge fund investors, the deal was quickly multiple times covered (including the upsize option), leading to the decision to upsize in full and then tag another upsize option of the same size on to the enlarged deal.

The deal had several things going for it, including a high coupon of 6%, a potential reset of the conversion premium and stock borrow provided by the chairman. Or as one source put it: “The reset provides protection on the downside. The bonds could be converted at a cheaper price than where the stock trades today and you get paid 6% to hold them in the meantime.” For someone who wants exposure to wastewater treatment or an environmental play in China, this was not a bad option – especially since the company doesn’t currently pay a dividend on its common shares.

And since the CB is denominated in renminbi, but settled in US dollars, investors will also benefit from any appreciation of the Chinese currency – something which has become increasingly likely since Beijing dropped its peg to the US dollar in June.

The bonds have a five-year maturity, but can be put back to the issuer after two years. There is also an issuer call after three years, subject to a 130% hurdle. They were offered with a coupon between 5% and 6% and a fixed conversion premium of 20% over Thursday’s closing price of S$0.77, giving an initial conversion price of S$0.924. However, with a one-time reset after the first year down to a floor of approximately 75% of the initial conversion price -- if the CB trades below the conversion price at the time -- the bonds could ultimately be converted into equity at a price as low as S$0.694.

The share price has gained 33% in the past 12 months, but is down 28% from a high of S$1.02 in early April this year.

The coupon was fixed at 6% and, given the par-in par-out structure, the yield will also be 6%.

While the terms may have looked generous from an investor point of view, Sound Global is clearly a high-yield credit -- it was marketed at a credit spread of 1,300bp over the renminbi credit curve -- and needed to be priced as such. The strong demand shows that the structure worked in terms of drawing investors into the deal, while the fact that the bonds were trading at 101 to 101.5 late Friday (after the share price fell 5.2% to S$0.73) suggests that the issuer didn’t leave too much on the table.

According to a source, the allocation was quite balanced between outrights and hedge funds, although the demand was skewed towards hedge funds. About 40 investors participated in the transaction, including some equity investors who were also said to have put in orders for the Hong Kong share offering in June. Indeed, the fact that the company did a roadshow ahead of its planned Hong Kong listing seems to have helped boost the demand for the CB as some investors at least were already familiar with the company.

The hedge funds in particular liked the fact that there was sufficient borrow, as it means they can monetise the volatility. According to an announcement issued by Sound Global, a company owned by chairman Wen Yibo and his wife will make up to 129 million shares available for stock lending through a securities lending agreement with Morgan Stanley, which was the sole bookrunner for the CB. The shares are enough to cover 88% of the stock underlying the CB at the initial conversion price, although 60% of them are callable at any time so as not to breech existing ownership restrictions.

Based on a credit spread of 1,300bp, full dividend protection, a stock borrow cost of 50bp, and an assumption that the share price would slip 5% in the wake of the transaction, the implied volatility also comes out at less than 5% -- well below the historic volatility of 35%. The theoretical value was estimated at about 112.

Sound Global said it would use 60% of the proceeds to invest in new build, operate and transfer (BOT) projects as well as other types of water and wastewater projects. Ten percent will go towards the repayment of existing bank loans and about 5% will be set aside for research and development. The rest will be used as working capital.

While it didn’t single out any specific projects, the company on August 12 said that it had entered into its largest BOT contract to date for a project in Lianyungang City in China’s Jiangsu Province. The project involves the construction and operation of a wastewater treatment plant and a water supply plant, with a daily capacity of up to 300,000 tonnes of wastewater and clean water respectively, which will almost double the current capacity of the company’s portfolio of BOT projects.

The total investment, which also includes the design and construction of 20 kilometres of water supply and wastewater collection pipes, is estimated to be about Rmb1.38 billion ($203 million) with a concession period of 30 years.

With regard to the potential Hong Kong listing, the company said it has had “positive preliminary discussions” with the Hong Kong stock exchange and will announce any material updates when appropriate. However, it stressed that the proposed listing is “still at an evaluation stage which will involve fairly extensive preparatory work and…may involve an uncertain time frame” and there is no guarantee that it will happen.

Morgan Stanley also acted as the sole bookrunner for Sound Global’s first attempt to list in Hong Kong in June. The US bank had a busy day on Thursday, pricing three deals. Aside from the Sound Global CB, it also arranged a $359 million equity sell-down in Korean auto parts maker Mando together with Citi and Macquarie, and a $500 million 5.5-year bond offering for PCCW together with HSBC, Royal Bank of Scotland and Standard Chartered Bank (for the latter, please see separate story on our website today).

On Wednesday, Morgan Stanley and Citi also brought a $92 million sell-down in Tiger Airways, which was priced at the top end of the indicated range and was doubled in size following strong demand.