Techtronic places CB with small group of investors

When it rains it pours. While rumours abounded on Wednesday and Thursday last week about an upcoming convertible by a Hong Kong-listed Chinese issuer and investment banks were busy fighting for a piece of that action, Hong Kong-based Techtronic Industries quietly placed a $125 million dual-tranche CB with warrants on Thursday night, beating Beijing Enterprises to the punch.

However, the Techtronic deal was privately placed on fixed terms with just six investors meaning Beijing Enterprises, which was finally launched after the market closed on Friday (see separate story on today's website), will still be regarded as the first publicly marketed CB from Hong Kong and China this year.

That said, one can argue that Techtronic's decision to approach a small group of investors on a private basis was the right approach given that it isn't that strong a credit and the deal may therefore have required more extensive marketing to convince investors to buy in. Even in the straight debt market there have been no high-yield bonds by Asian issuers since June last year and one source argues that a privately placed CB, especially with warrants, allowed the company to obtain cost-effective pricing compared with what it might have achieved in the high-yield bond market, even if, at first glance, the conversion premium looks very low.

The same source notes that the private route may become the way forward for more companies in a similar situation.

"It will depend on the issuer. If it is a high-grade, household, blue-chip name, it is likely to choose the public markets, but if it is not as well known, then the private market is an alternative. I think we will see a divergence," the source says.

Aside from the more targeted marketing, a private deal can also be completed much more quickly since it doesn't require a publicly filed prospectus. Equity investors balked at the potential dilution, however, and pushed the share price 18.5% lower on Friday to HK$3.93.

Techtronic, which makes home-improvement products such as vacuum cleaners, including the well-known Hoover brand, power tools and outdoor power equipment, sold its CB in two tranches to get around the fact that it was only allowed to issue up to 10% worth of new equity under its current shareholder mandate. It will seek a new mandate at an extraordinary shareholders meeting currently scheduled for May 27 and assuming shareholders give their okay, tranche 2 will settle on May 29. Aside from the size and the settlement date, the two tranches are identical, however, and were allocated to the participating investors on a pro-rata basis.

Both tranches also include detachable warrants on the basis of one warrant for every four shares underlying the bonds. The warrants add value to the CB and are also carried as equity on the balance sheet from day one, which is beneficial to the company's debt-to-equity ratio. CBs are counted as debt until they convert.

Tranche 1 of the CB amounts to $74.1 million and accounts for 7.4% of the existing share capital, or 9.2% when including the shares underlying the warrants, while tranche 2 is $50.9 million in size and accounts for 5.1% of the current share capital, increasing to 6.3% if the warrants are included. Tranche 2 also has an upsize option of $25 million, which if exercised will boost the Tranche 2 portion of the existing share capital, including warrants, to 9.4%. If the warrants are exercised in full, Techtronic will raise a combined $137 million from the issue, increasing to $162 million if the upsize option is also put to use.

The CB has a five-year maturity, but can be put back to the issuer after three years at par. There is also an issuer call after three years, subject to a 130% hurdle. The bonds were offered with a coupon of 8.5% and a conversion premium of 8.6% over the five-day volume-weighted average closing price of HK$4.7868, which gives an initial conversion price of HK$5.20 per share. Following Friday's share price drop, the effective premium widened to 32%, however.

People close to the deal say the premium was kept down at launch partly because the share price has rallied 30% since the beginning of April when the deal was first mandated. However, the company may also have had to offer a bit of a pricing incentive to investors to compensate for the fact that the limited distribution will make the CB very illiquid. The bonds can be converted into equity at any time, starting 18 months from now.

Despite the strong gains recently, Techtronic's share price is still down 36% from the HK$7.50 level where it traded before taking a significant plunge in October last year.

The warrants have a three-year maturity and a strike price of HK$5.10 per share, a slight discount to the conversion price and a 6.5% premium to the five-day closing VWAP. They can be exercised at any time after April 30, 2010.

With a bond floor of about 80%, the CB has quite a high equity content and it was perhaps natural that the buyers comprised outright equity investors as well as hedge funds. The offering was fully distributed among the six investors, which did not include any entities owned by either of the bookrunners.

Merrill Lynch, HSBC and Citi were joint placing agents, with Merrill taking the lead at the left of the term sheet and the bulk of the 1.75% fees. Some say the other two banks were included for relationship issues, although Citi has reportedly been working with the company on a deal for some time.

Techtronic said it will use the proceeds to repay debt and for general working capital purposes, while the offer will also allow the company to broaden its shareholder base.