Tom.com, the Greater China media group controlled by Li Ka Shing group companies, completed the largest ever convertible from Hong Kong's GEM market yesterday (Thursday), raising $150 million. With Citigroup and Deutsche Bank as joint lead managers, the group also increased the deal slightly via the greenshoe, which was raised from $25 million to $35 million.
Tom.com is said to have been evaluating the equity-linked market for the last couple of months and decided timing was opportune after Brilliant China's successful $170 million convertible last week. The onset of rising interest rates, exemplified by moves this week from the Australian and British central banks, is also said to have acted as a prompt.
The actual timing of its deal, however, was slightly unfavourable, with Asian markets starting to tumble shortly after it launched its deal at noon Hong Kong time. The Hang Seng Index, for example, dropped 2.3% over the course of the day and made investors particularly sensitive to the deal's conversion premium.
Final terms comprise a five-year maturity and coupon of 0.5% with a put option in year three at 102.86% and redemption at 103.86%. This equates to a yield of 1.25%. The deal was marketed with a put range of 101.53% to 103.1%, redemption range of 102.56% to 105.17% and yield of 1% to 1.5%.
The conversion premium was set at 30% to the stock's HK$2.55 close, having been marketed on a 30% to 35% range. Year-to-date, the stock is up 37.10%, outperforming the overall GEM market, which is up about 30%.
The convertible also incorporates a call option, which falls after three years and 15 days subject to a 125% hurdle.
Underlying assumptions comprise a bond floor of 87.15%, implied volatility of 33.1% and theoretical value of 103.5%. This is based on a credit spread of 300bp over Libor, zero dividend yield, 2% stock borrow cost and 45% volatility assumption. Tom.com's 100-day volatility stands at 52%.
Compared to recent deals by Brilliance China and Citic Financial, Tom.com's bond floor is very aggressive. The two former deals both priced around the 89.9% level.
However, Tom.com did make some stock borrow available and observers also report availability of additional borrow in the wider market. About 15% of accounts received borrow in the primary market.
As one argues, "The option is pretty attractive given the high volatility of the underlying stock and existence of a fairly liquid borrow market."
Compared to its two predecessors, Tom.com also offers a higher yield of 1.25% versus 0.25% for Citic and 0.75% Brilliance, plus a cash coupon. Brilliance, on the other hand, had a zero coupon structure, while Citic offered a slightly lower coupon of 0.25%.
On the day of pricing, Standard & Poor's assigned Tom.com a BB+ rating, underlining the company's "strong support from its major shareholders, key market positions in diverse segments of the media industry and sound financial management." However, there was said to be no credit bid in the primary book, although bankers did notice the beginnings of a credit trading after the deal began secondary market trading.
Books were left open until 5pm to catch part of the London trading day and closed with about $600 million of demand. About 100 investors participated.
Outside observers also noted wide participation in the deal, adding that the deal's aggressive terms meant accounts were only willing to purchase small chunks of paper.
Tom.com management have not specified a use of proceeds. The group currently has a 40% share of Taiwan's magazine sector, 33% share of books sales and accounts for about 50% of outdoor advertising spending on the Mainland.
