Both parts of the deal saw pretty strong demand, which allowed the yield and the conversion premium on the CB to be fixed at the tight end, from the companyÆs point of view, while the price on the equity portion was fixed at the mid-point of the $30 to $32 offering range. However, one of the selling shareholders was more price sensitive than that and opted not to sell all of the shares it originally planned, reducing the overall size of the offering to 5.6 million American depositary shares (ADS) from the initial seven million.
The greenshoe was also reduced to stay at 15% of the new offering size, meaning the bookrunners now have the option to sell another 840,000 ADSs if the stock continues to perform in the aftermarket. The CB has an upsize option of $22.5 million.
The two largest sellers of equity were Baytree Investments, which is a unit of Temasek Holdings, and investment company Inspiration Partners, which according to the original filing were to sell 4.75 million shares, reducing their respective stakes to 5.1% (Temasek) and 4.5% (Inspiration Partners). It wasnÆt clear last night which of these two had decided to sell fewer shares.
The combined transaction was launched after the close of New York trading on Monday and completed before the market opened again on Tuesday û an unusually speedy execution for a post-IPO follow-on or sell-down by a US-listed Chinese company. Typically these deals are done on a fully marketed basis, but with the potential for additional market volatility following yesterdayÆs Federal Open Market Committee meeting, the company and the sellers likely felt that they would be better off to do a quick trade.
And it seems they may have been right. During the night, the Fed announced that it had opted to cut its benchmark interest rate by 25 basis points, disappointing some market participants who had been hoping for half a percentage point cut and triggering a sharp drop in the equity markets. The Dow Jones index, which had been trading higher before the announcement, reversed course and finished down 2.2%.
Yingli, which prior to the announcement had held well above the $31 placement price and in fact had traded above $32 for much of the session until then, extended its losses to finish at $30.14 - a decline of 10.3% on the day and 2.8% below the placement price.
The placement price represented a 7.7% discount versus MondayÆs close of $33.60, which sources say wasnÆt bad given that the stock wasnÆt trading during the bookbuild. Typically the share price will edge slightly lower while a deal is on the road, and this is then adjusted for by pricing at a tighter discount.
YingliÆs share price has also traded up 30% in the two weeks since the company re-filed with the regulators saying it would scrap its earlier plan to sell new shares and sell CBs instead. Almost half of that gain, or 14.4%, was recorded over this past Friday and Monday. The company had initially intended to sell three million new ADSs together with the sell-down, but the deterioration in market sentiment for new stock û especially from Chinese companies û made it change its mind and go for a CB instead. The latter should be more palatable for investors at times of volatility since it gives them some downside protection.
Goldman Sachs was initially mandated as the sole bookrunner of the combined follow-on and shareholder selldown and was also the only bank named on the second filing when the follow-on was change to a CB. When the deal launched yesterday, however, Credit Suisse and Merrill Lynch had been added as joint bookrunners, suggesting the company was feeling somewhat uneasy about leaving its fate in the hands of just one bank in the current volatile environment. The fact that the deal was executed overnight may have also have played a role here.
Yingli's IPO in June was arranged by Goldman and UBS.
According to sources, both the equity portion and the CB attracted more than 100 investors and many of them bought into both legs of the transaction. A lot of existing shareholders also came in to support the deal, which is common on these types of sell-downs by pre-IPO investors. This was the first placement of Yingli stock since its IPO.
The CB was priced with a conversion premium of 40% over the placement price after being marketed with a 35%-40% range. Accounting for the placement discount, the actual premium versus the latest close was a less aggressive 29.2%, but because of the drop in the share price yesterday the premium actually widened to 44%.
The yield to put and maturity was fixed at the bottom of the 5.125% to 5.625% range.
The bonds were issued at par, will pay no coupon and can be put back to the issuer at the third anniversary. Based on a credit spread of 550 basis points over Libor and a stock borrow cost of 3%, the bonds were valued with a bond floor of 87.8% and an implied volatility of 39.4%.
Because it is possible to short the stock, a number of specialist funds were attracted to the CB as a volatility play even though the availability of borrow is somewhat limited given that 60% of the company will still be held by pre-IPO shareholders, company directors and executives.
ôFor people who can get hold of stock to borrow, this is a pretty easy trade to do, given that the historic volatility is quite high,ö says one observer.
Indeed, the 30-day volatility is a massive 105%, while the 100-day volatility eases only slightly to 93%. The share price has risen 174% since the IPO.
YingliÆs strength lies in that it is an integrated solar power company that is active across the entire value chain from the production of wafers and ingots to the installation of solar PV systems. This gives it better control over its margins and also ensures a more reliable supply of wafers which remain a key bottleneck within the solar power industry.
According to the filing with the Securities and Exchange Commission, the company will lend $100 million of the net proceeds from the CB offering to a subsidiary which will use it to fund part of the construction of new manufacturing capacity. The plan is to to add 200 megawatts of additional capacity for each of polysilicon ingots and wafers, PV cells and PV modules by the end of 2009.
The rest will be used for general corporate purposes, including the prepayment of polysilicon supply and potential strategic acquisitions.
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