The bought deal, which was fully underwritten by JPMorgan, was offered to investors with fixed terms that included a 45% conversion premium and a bond floor of 95.9%.
The bond issue was completed late Thursday (May 11) and was the third convertible from a company listed outside India or Hong Kong in a week following a $176.9 million deal from Indonesian oil and gas explorer PT Medco Energi and a $120 million issue from Taiwanese chip maker Winbond Electronics.
Both of those issues were the first from their respective countries this year, while Celestial NutrifoodÆs offer was only the second CB out of Singapore. Some observers argued, however, that this sudden spurt of equity-linked paper from outside this yearÆs two main markets was most likely a coincidence and doesnÆt herald a wave of issuance from these market going forward.
To be fair, Singapore-listed Celestial is also in all other respects a Chinese company with all its operations and most of its sales in the mainland. However, there has been no denying that each of these bond issues attracted additional demand simply because they did not come from India or China/Hong Kong.
Indian companies account for 66% of the total CB issuance of $6.93 billion so far this year, while Chinese and Hong Kong companies combined make up 21.7%, according to Dealogic data. (Depending on where they are incorporated, many Chinese companies count as Hong Hong-based, making a breakdown less useful).
Celestial, which is a leading producer of soy protein-based food and beverage products under the ôSun Moon Starö brand, initially offered S$220 million ($140.6 million) worth of bonds with an option to increase the size by another S$15 million. That option was exercised immediately after the book ended up multiple times covered, according to a source familiar with the transaction.
Since it was a bought deal, marketing was more targeted than for a deal using an accelerated book-build and the bonds were believed to have ended up with just under 20 investors. Both Asian and European accounts were said to have shown good interest in the deal, primarily because of the strong equity story.
The zero-coupon bonds have a five-year maturity but can be put back to the issuer at the end of year three at 116.65% for a yield to put of 5.2%. The were issued at par and are redeemable at 129.263% for the same yield.
However, if the share price continues to perform like it has so far this year the bonds will be converted before that as there is a mandatory conversion after 18 months subject to a 135% hurdle. The shares have already rallied 236% this year and are up 596% since their initial public offering in early January 2004.
The conversion price was fixed at S$2.57, or 45% above the volume weighted average price in the three days leading up to the deal which came out to be S$1.77. The conversion premium was the highest for a CB out of Singapore since Singapore Petroleum priced its offer with a 47% premium in March 2004. That deal was also led by JPMorgan.
However, the premium was a much less aggressive 32% over ThursdayÆs record close of S$1.95 after the shares rallied 14.7% on that day.
The assumptions included a credit spread of 300 basis points over the Singapore Interbank Offered Rate, a dividend yield protection which starts at 0.62% in 2006 and gradually increases each year to reach 1% in 2011 and a stock borrow cost of 5%.
Aside from the 95.9% bond floor, this also gave an implied volatility of about 25%, which compared with a 90-day historic volatility of 71%. However, the latter has little real meaning as there is no borrow available for the stock.
JPMorgan provided no credit bid on this deal, which underlines the fact that it was pretty much an equity story. The bonds were trading slightly above par at 101% of face value on Friday, according to market watchers. The Singapore equity market was closed for a holiday.
ThursdayÆs sharp share price gains came after the company announced strong earnings and also said it had signed a memorandum of understanding with JapanÆs Daiki to start manufacturing bio-diesel, making use of by-products from its soya bean production process.
Investors were also said to have been drawn to the convertible bonds because of a value gap between Chinese companies listed as red-chips in Hong Kong and those trading on the Singapore exchange which are lagging as a group.
ôPeople have been overlooking the fact that these companies are undervalued plays on China,ö one observer says. ôI donÆt think anyone expects the same rapid growth rate (for Celestial NutriFoods) as weÆve seen so far this year, but if you want to play the China story, this is a good option to take.ö
In the first quarter, the company saw a 33.5% improvement in net profit to Rmb82.5 million on a 34.4% rise in revenues to Rmb231.3 million. Strong growth in sales of health food and beverages, which accounted for 84% of sales and 93% of gross profit, was a key factor for the higher income together with lower raw material costs and higher efficiency in the production process.
By the end of the second quarter, the company is due to start commercial production at its new ôSoyabean Zoneö facility at Daqing City, which will increase its total production capacity to 213,500 tonnes per year from 53,000 tonnes at present and act as a major growth driver.
Analysts also welcomed the move into bio-diesel on the account that it will diversify the companyÆs revenue stream. The joint venture with Daiki, in which the company will hold a majority stake (the exact size hasnÆt been disclosed), plans to produce 100,000 tonnes of bio-diesel per year from a facility located within the Soyabean Zone.
Production is expected to start by the end of 2007 and the combined investment amount is targeted to be approximately Rmb362 million, according to a company release.
DaikiÆs primary business activities include the production and sale of housing and environmental equipment, research and development of bio-diesel and the production and sale of bio-diesel production equipment.
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