The manufacturer of gearboxes for wind power turbines attracted good interest for the US-dollar settled bonds, and was able to increase the deal from an initial Rmb1.75 billion ($250 million) using part of the available upsize option. However, the conversion premium and the yield were both fixed at the most generous end from the investorsÆ point of view, indicating that they are not willing to take more risks than necessary to increase their exposure.
According to one source, the deal was more than two times covered at the final size after attracting about 25-30 investors. The bonds traded up to about 101 yesterday, confirming that the demand exceeded the allocations. China High Speed's shares were suspended from trading.
The conversion premium was offered in a range of 30% to 40%, which must be regarded as quite punchy û especially since the bonds have a maturity of only three years and will pay no coupon û and quite predictably it was set at the bottom. However, this too can be considered quite aggressive and observers say it would have been difficult to bring such steep terms had it not been for the companyÆs strong equity story. Or as one observer put it: Investors want to believe that the bonds have a chance to get æin the moneyÆ and technicals alone arenÆt enough to carry a deal in the current market environment.
Like most other China-related stocks listed in Hong Kong, China High SpeedÆs share price is trading significantly below its highs in the fourth quarter of 2007, but even so, it is still up 99% from its IPO price of HK$7.08 in June last year. According to Bloomberg, this makes it the second best performer among the 87 companies that have listed in Hong Kong since the beginning of 2007.
Also helping to convince investors to accept the high premium was the fact that it was fixed over TuesdayÆs volume-weighted average price, which came out at HK$13.6783 or 3% below the dayÆs closing price of HK$14.10.
The yield was fixed at the top of the 2% to 3% offering range. The bonds carry a mandatory conversion feature after two years should the issuer choose to force conversion. The decision not to use a normal soft-call is related to the high volatility in the stock, which means the share price could quite easily fall to a level where investors might choose to redeem the bonds instead of converting during the 30-day notice period. The mandatory conversion can be used if the bonds are trading above 120% of the accreted value.
As has become almost a rule on Asian CBs this year, the bonds were sold without the backing of asset swaps or credit default swaps, but the bookrunner did make it easier for the bond-buyers to hedge the equity option by entering into an equity swap with China High Speed. Under the swap arrangement, which is almost identical to that used by Merrill Lynch on a CB for Country Garden in February, China High Speed will use half the bond proceeds to buy back shares in the market that they will then swap with Morgan Stanley. In turn, Morgan Stanley will then do a matching swap with the bond investors to pass on the short position.
Ensuring that there is enough stock-borrow available to allow bond investors who wish to do so to go short the equity has become almost critical for the successful completion of Asian CBs û especially since the asset swap and CDS markets have all but dried up. Helping to facilitate the hedge would typically allow the issuer to use a slightly higher conversion premium and in the case of China High Speed and Country Garden, the buy-back of shares should also have a positive impact on their share prices.
According to sources, Morgan Stanley suggested a credit spread of Libor plus 700bp, which appeared to have been acceptable to most. Some investors did chose to use a spread of 750bp, however. Together with a full dividend pass-through and a stock borrow cost of 1%, this gave a bond floor of about 96% and an implied volatility between 25% and 30% - assuming the historic volatility was capped at 40%. In reality, the 100-day volatility is above 70%, although that is partly to do with the sharp gains in the wake of the IPO.
China High SpeedÆs earnings report on Monday showed that revenues increased by 60.8% to Rmb1.9 billion in 2007, while net profit soared 258% from the previous year to Rmb306.7 million û well above the Rmb180 million profit that the company projected in its listing prospectus in June last year. The company said it will strive to increase its production capacity of wind gear transmission equipment to 3,500MW this year, from 1,300MW in 2007.
This was only the second renminbi-denominated CB this year after Country GardenÆs Rmb3.6 billion ($500 million) deal in mid-February. It was also only the second equity-linked deal by an Asia-listed issuer since KhazanahÆs $550 million exchangeable sukuk into Parkson Retail in early March, which shows how thin the new issuance market has become.
On April 1, Singapore-listed CapitaCommercial Trust (CCT) raised S$280 million ($203 million) from a CB that was fully-underwritten by Standard Chartered, although according to investors and rival bankers the bonds failed to find enough buyers at the time and Standard Chartered was believed to be holding a significant portion of the deal the day after pricing.
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