Almost two-and-a-half years after its debut in the international capital markets, Vietnamese property developer Vincom has raised $185 million from its second ever convertible bond that was priced in the early hours yesterday morning.
The bonds traded down in the secondary market yesterday as the share price fell 4.9%, but the deal achieved better terms and was 85% bigger than the company’s first CB in November 2009, which from Vincom’s point of view at least, makes this a successful transaction. It also suggests that investors are now willing to look beyond the December 2010 default of state-owned shipbuilder Vinashin and put money to work in Vietnam again as the economy shows signs of recovering (inflation and interest rates are both on their way down and the currency fluctuations seem to be under control).
“What happened with Vinashin is not the norm in Vietnam, it is an exception,” said a source, although he acknowledged that it has meant that a lot of public funds have turned away from investments in Vietnam amid concerns that the government won’t step in and support its state-owned enterprises. At least a couple of Vietnamese companies tried to issue in the international debt market in the aftermath of the Vinashin default, but were forced to call off the attempts amid a lack of interest. And, so far, Vincom is the only Vietnamese company that has issued a US dollar CB in the public market, although others have raised capital from privately placed CBs.
But sentiment is improving. In addition to Vincom, Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank) is planning to issue a dollar bond this week through Barclays and HSBC.
The Vincom offering, which was arranged by Credit Suisse, was initially launched at a base deal of $150 million plus an upsize option of $100 million. According to a source, the order book was in excess of $200 million, although some of those orders didn’t match the terms on offer and in the end the issuer settled for a deal size of $185 million – almost twice the $100 million it raised in 2009. The company is also keeping the remaining $65 million of the upsize option and may still use that over the next 30 days if the price recovers.
The CB has a five-year maturity, but can be put back to the issuer at year two. There is also an issuer call after two years, subject to a hurdle of 130%. The bonds were offered with a 4.5% to 5% coupon and a yield-to-put of 6.5% to 7%. Both were fixed at the investor-friendly end, resulting in a 5% coupon and 7% yield. The source said the issuer was not too worried about pushing the terms as its key objective was to achieve as large a size as possible. The company had approval to issue up to $300 million of CBs and said it will use the proceeds to finance new investments in property developments, as well as for working capital and other general corporate purposes.
The 2009 CB featured a coupon of 6%, although there was no additional yield. The lower coupon means the new bonds will be significantly cheaper for the company to service in the early years. By comparison, the company would probably have to pay interest of 8% to 9% in the loan market and provide two times security coverage – assuming it would be allowed to borrow in dollars at all. Vincom likely expects the bonds to convert into equity so that it won’t have to pay the additional yield.
The latter is indeed quite likely since the CB comes with a low conversion premium of 10% versus Tuesday’s close of VND102,000. There is also an annual reset, starting from October 3 this year, that may lower the conversion price to the 10-day volume-weighted average price, down to a floor of 80% of the initial conversion price of VND112,200.
The premium was fixed at the tight end of a 10% to 15% range, but is still wider than the 5% it achieved last time. The first bond, which also had a reset and was adjusted for a two-for-one bonus share issue in 2010, has been fully converted into equity following a clean-up call a few months ago and market watchers note that on a two-year basis it yielded a return of more than 50% -- making it one of the best Asian CBs in recent years. The company’s first CB was also arranged by Credit Suisse.
Based on yesterday’s close of VND97,000 and adjusted for the bonus issue, Vincom’s share price has gained 80% since the previous CB was issued, supported by its strong sales growth. However, it is come down from a record high of VND137,000 in June last year.
The conversion of the previous deal and the share price gains were obviously helpful in attracting investors to the new deal and to help them overcome their potential concerns about investing in Vietnam. However, it is clearly not a market that appeals to everyone and the CB was placed with a fairly small group of just over 20 investors. Close to three-quarters of the bonds were taken up by investors who had also bought Vincom’s first CB, but encouragingly the order book also included some big names that were new to the company.
More than 60% of the deal went to outright accounts, which is no surprise since the CB isn’t really hedgeable, although supposedly some CB holders were able to source some stock borrow in the market yesterday, which may have been part of the reason why the bonds fell in the secondary market. From a geographical point of view, about 60% of the bonds were sold to Asia-based investors, while the rest went to Europe. The deal wasn’t open to onshore US investors.
The deal was marketed with a credit spread of 800bp to 1,000bp over the Vietnamese dong swap rate. Based on the final terms and assuming a 5% stock borrow cost and full dividend protection, this gave a bond floor of about 94% to 97% and an implied volatility of 4% to 7.5%, according to the source. The latter looks very cheap compared with a historic vol in the mid-40s, but the latter is viewed to be exaggerated because of the thin liquidity in the stock.
Credit Suisse has been doing some marketing work with investors for the past two to three weeks, and Vincom has also had regular calls with investors ever since it printed its first CB, meaning many of the investors who do look at emerging frontier markets like Vietnam were already familiar with the company. An offering circular was published on Monday morning, giving investors plenty of time to consider the deal before the terms were announced at about 6pm (Hong Kong time) on Tuesday. The order book was kept open until 2am yesterday morning.
Market participants said the CB was quoted at 98 to 98.5 in afternoon trading yesterday.
