Asia Cement adding CB to funding mix

Taiwanese cement producer set to raise equity-linked debt to help fund takeover of China Shanshui Cement following boardroom battle.

Taiwan-listed Asia Cement has announced plans to raise convertible debt as it seeks to gain full control of China Shanshui Cement following a boardroom tussle.

In a filing to the Taiwan Stock Exchange, the group said it hopes to raise $400 million from a zero-coupon issue, its first equity-linked deal in just over two years.

Proceeds should help fund its proposed takeover of Shanshui in which it already owns a 20.9% stake. On Wednesday, Asia Cement and state-owned China National Building Material (CNBM) announced a joint conditional cash offer to purchase all the outstanding shares in the Hong Kong-listed cement maker they do not currently own.

Together the two hold a 62.4% stake in China’s seventh largest cement manufacturer by capacity. And based on Shanshui’s last share price of HK$6.29, it will cost them at least HK$13.3 billion ($1.72 billion) to buy out the remaining shareholders.  

The proposed takeover has been triggered by disagreements with rival cement manufacturer Tianrui Cement, which increased its stake in Shanshui to 28.2% in April, making it the largest single shareholder.

Tianrui then sought to oust Shanshui’s chairman Zhang Bin and install new board members, but was defeated at an extraordinary general meeting at the end of July. It has subsequently said it will not participate in any general offer for the company.

Shanshui’s shares have been suspended since mid-April, when Tianrui stake purchase pushed the company’s freefloat to 9%, below the 25% regulatory minimum.

The convertible bond

Lead managers for the convertible bond offering will be Bank of America Merrill Lynch, Goldman Sachs, HSBC and Standard Chartered according to one source close to the deal. Similar to past transactions, the new dollar-denominated issue is likely to have a five-year maturity with a three-year put option.

The prospective issue will mark Asia Cement’s fifth equity-linked offering following a $200 million deal in 2013 and a $172.5 million issue in 2011

The group also raised $375 million from an exchangeable bond into Far Eastern New Century in 2011 when it was known as Far Eastern Textile and another $180 million from an exchangeable into the same entity in 2008.

Proceeds from previous issues were mainly used to repay the maturing bonds.

The two most recent convertibles were issued with respective conversion premiums of 24.5% and 28%.

The shorter-dated 2016 convertible is slightly in-the money, trading at 100.9%/101.9% on Wednesday. The longer-dated 2018 paper was indicated at 99.1%/99.6%.

Asia Cement share price has fallen from a five-year high of NT$43.28 in September 2014 to close at NT$34.30 on Wednesday, down 1.58% on the day. The stock has never reached the strike prices of the two existing CBs – NT$50.17 for the 2016 deal and NT$48.00 for the 2018.

The decline has mainly been attributed to falling cement prices particularly in China, where they have slumped to six-year lows. In a recent research report, JP Morgan analysts argued that they will continue to remain under pressure for the rest of this year.

However, other analysts see signs of a bottoming out, with the average selling price rising to Rmb253.83 per tonne, last week, a 0.39% week-on-week increase.

The share prices of major producers have responded to signs of a turnaround by rising sharply over the past couple of weeks. Anhui Conch is up 12.7% since July 28, while CNBM is up 9.6%, although it fell 2.72% on Wednesday after news of its offer for Shanshui was made public.

Shanshui’s outstanding bonds, on the other hand, responded extremely positively to the news that an end to its troubles may be in sight. Over the past few months, the group’s credit rating has been slashed, with Standard & Poor’s cutting it to CCC and Fitch to B+.

As well as its managerial issues, the company has also been facing a liquidity crunch thanks to the trigger of a change of control put option on its $400 million 2016 bonds. The rating agencies said the company had adequate cash to redeem the bond issue, but not enough to cover all the remaining short-term debt that matures before the end of the year.

On Wednesday, its $500 million 7.5% deal traded up eight points to a high of 101% before profit taking pushed it back to a 3.5 point rise. At its lowest point this year, the deal had traded down to the low 80’s.

Asia Cement’s forthcoming convertible will be a welcome one for Asian equity-linked bankers who are witnessing one of their slowest years in terms of new issue volume, in part due to looming rate hike in the US. Year-to-date, issuance from Asia ex-Japan has totalled $6.6 billion from 91 deals, less than one-third of last year’s $20.3 billion, according to data from Dealogic.

However, Taiwan has seen a pretty decent flow of business from repeat issuers such as United Microelectronics Corporation and TPK. Year-to-date new issuance from the country has reached $2.5 billion from 69 deals.

This puts it on track to beat last year’s $2.7 billion issuance.

¬ Haymarket Media Limited. All rights reserved.
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