Yanlord issues first CB/placement combination this year

While it is not the first Chinese property developer to tap the equity capital markets in recent months as the sector prepares to take advantage of falling prices to acquire more land, Singapore-listed Yanlord Land Group is the first one this year to use a combination of convertible bonds and new shares to achieve its funding target.

The idea of a combination deal is not new to Yanlord, which completed a similar transaction in January 2007, and sources say the management -- and the chairman in particular -- had been intent on this structure from the beginning as it didn't want to cause too much dilution for existing shareholders by selling only new shares. At the same time, it felt that an all-CB deal would have resulted in too big an increase in its overall debt level. By combining the two, the dilution will occur at a higher future share price and will thus be smaller, and the company will still have room to borrow onshore in China as it acquires more land, should it choose to do so.

According to sources, the company wanted to raise a total of S$500 million, but after upsizing the equity portion, it achieved a bit more than that. The total deal size as of early this morning was S$525 million ($360 million), split between a S$275 million five-year CB (with a put option on the third anniversary) and a S$250 million equity placement. The upsize option on the placement tranche was exercised in full, which saw an additional 20 million shares brought into the deal -- 10 million new shares and 10 million existing shares sold by chairman Zhong.

The S$100 million upsize option on the CB was not exercised as the demand was insufficient to cover a bigger deal, but joint bookrunners J.P. Morgan and Royal Bank of Scotland do have the option to exercise it over the next 30 days in case of renewed interest in the bonds.

Based on yesterday's experience, the Singapore dollar-denominated CB was a rather harder sell than the equity portion, however, and while it was fully distributed, the deal was no more than 1.5 times covered. The number of buyers was also relatively small at around 25.

Part of this may have been due to the fact that the deal did not include a stock borrow facility, and with virtually no stock available to borrow in the market, this meant there was really no reason to buy the bonds from a technical perspective. Indeed, while the majority of the buyers were hedge funds, they were primarily buying the CB on an outright basis -- for the equity story and the potential to participate in the future growth of the company.

The lack of a borrow facility meant the company had to compensate investors with a higher coupon with some observers saying it may have had to pay as much as 100bp to 150bp more than if the chairman -- or some other large shareholder -- had agreed to lend his shares to create a synthetic short position for the CB holders or if the company had used part of the proceeds from the placement tranche to buy back shares. However, one source close to the offering noted that the Yanlord transaction shows that it is possible for a high-yield Asian corporate to do a CB without either stock borrow or asset swaps, which should be encouraging for other companies that are pondering a similar transaction.

Investors also genuinely like this name and the fact that it has an outstanding CB which the bondholders have made money on already would have helped to attract interest to the new offering.  

The CB was marketed with a coupon between 4.85% and 5.85% and a conversion premium of 26% to 35%. However, the latter was based on the placement price, which was fixed at a 10% discount to yesterday's close, meaning the effective conversion premium was actually quite a bit lower.

After several hours of bookbuilding, the terms were fixed at the best end from an investor point of view, resulting in a coupon of 5.85% and a conversion premium of 26% over the placement price of S$2.08 -- or 13.5% over yesterday's close of S$2.31. The bonds are both issued and redeemed at par, which means the yield is equal to the coupon.

Instead of the usual call, the bonds have a mandatory conversion feature after two years, subject to a 130% hurdle.

Meanwhile, the equity portion, which comprised 120 million shares including the upsize option, was offered at a price between S$2.08 and S$2.16. This represented a discount of 6.5% to 10% versus yesterday's close -- or rather the latest traded price, as the stock was suspended with slightly less than one hour left of the session. While this does seem a bit odd, especially since the deal wasn't launched for another couple of hours, the company may have wanted to lock in the market price once it had agreed on the price range. By the time the stock was suspended, it was up 1.8% on the day. It has risen about 230% since late February and set a new 52-week high in early June.

That in mind, it was perhaps not too surprising that the investors wanted as big a discount as possible, and the final price was fixed at the bottom of the range for the maximum 10% discount. The company was also said to have pushed the bookrunners close to their pricing limit before launch, leaving little scope to drive the price a bit further once the deal was in the market.

However, according to sources, this portion of the deal attracted relatively more demand and ended up about 2.5 times covered with approximately 50 participating accounts. The book included a few sizeable anchor orders and the buyers comprised about two-thirds long-only investors and one-third hedge funds. The majority came from Asia, with some demand from Europe and the US.

There was also some overlapping demand with some of the typical CB investors in the book also buying part of the equity placement and vice versa.

The CB was marketed to investors at a 750bp spread over the Singapore Interbank Offered Rate, a level which observers said was reasonable given Yanlord's reasonably healthy cash balance of about S$600 million before this deal. It was also largely in line with where Yanlord's outstanding CB is trading. Other assumptions included a 5% stock borrow cost and a full dividend pass-through.

This gave a bond floor of 85%-86% and an implied volatility of about 35%. The latter was considered quite aggressive in light of the current market environment - and a 260-day historic volatility of about 80% - but given the lack of hedging opportunities for the equity option, this wasn't really a focus for most buyers.

The line-up of J.P. Morgan and RBS as joint bookrunners, albeit with the economics split 70/30 in favour of the US bank, did raise some eyebrows. Many observers expected Goldman Sachs would be on the deal since it was the bookrunner on Yanlord's previous follow-on of shares and convertible bonds in early 2007 - a highly successful deal that was upsized to S$725.5 million and raised more than double what the company pocketed from its Singapore IPO six months earlier. The IPO was arranged by CLSA and HL Bank.

Banking relationships with the issuer were expected to have played a role, but sources also said that J.P. Morgan had showed the company more aggressive terms before clinching the mandate than those that were eventually offered to investors. However, specialists said last night that the term sheet was in line with what had been sounded out in the market in recent days.