Beijing Enterprises raises $275 million from CB

The hotly contested deal attracts good demand despite fairly aggressive pricing as investors buy the equity story, while taking comfort in the company's status as a quasi-sovereign issuer.

Beijing Enterprises on Friday became the first Hong Kong-listed company to issue a publicly marketed convertible bond since May last year. Despite fairly aggressive pricing, the deal was well received and upsized by 21%, which allowed the Chinese utilities company to raise HK$2.15 billion ($275 million).

According to sources, the five-year bond, which can be put back to the company after three years, was about 2.5 times covered and attracted 50 or so investors in the close to three hours that the books were open. Fundamental equity investors featured prominently alongside the usual hedge funds as the stockmarket recovery over the past six weeks has made them keen to get exposure to any further equity upside, but at the same time, retain some protection on the downside in case the current rally loses steam or the markets take another turn for the worse.

The bonds were offered with a coupon between 2% and 2.25% and a conversion premium between 22.54% and 27.54% over Friday's close of HK$35.50. The decimals on the premium were explained by the fact that the issuer wanted a conversion price of at least HK$43.50, which was equal to 22.54%. Joint bookrunners Nomura and Credit Suisse underwrote the deal at this level and this was also where the final premium was fixed. The coupon was set at 2.25%, and since the bonds are both issued and redeemed at par, this is also equal to the yield. Beijing Enterprises has the right to call the bonds after three years, subject to a 130% hurdle.

Given that the terms were aggressive to begin with, it was no surprise that both the premium and the coupon ended up at the most favourable level for investors, but one source noted that after a few days of consulting investors and sounding out the deal in the market, the bookrunners were also clear that this was where the demand was.

"The ranges were added after the fact, in case the deal were to go extremely well," says one source, but in light of the fact that this was one of the first CBs this year and that it was sold on a Friday night and thus made investors take on weekend risk, there was no real desire to push the pricing.

As of Friday night, the bonds were trading at par to 100.5 in the grey market, suggesting that this was a wise decision. By containing the pricing, the company was also able to immediately increase the deal from a base size of HK$1.78 billion ($228 million) by exercising the HK$370 million upsize option.

The tight pricing was underscored by the fact that, only a day earlier, Chinese manufacturer of home improvement products Techtronic Industries raised $125 million from a CB that was privately placed with six investors and offered a coupon/yield of 8.5% and a conversion premium of 8.6%. Techtronic is a lower quality credit than Beijing Enterprises and would also have had to offer investors some additional incentive to take the bonds given that the limited distribution means they are bound to be illiquid, but even so, the difference in price between the two deals was marked.

Earlier this month, Korean construction materials manufacturer KCC Corporation also sold $200 million of five/put three bonds exchangeable into ordinary shares of Hyundai Heavy Industries with a 3.5% coupon (equal to the yield) and an exchange premium of 22%.

The closest deal in terms of pricing so far this year is the $300 million of five/put three CBs issued by Korea's SK Telecom in mid-March, which came with a coupon/yield of 1.75% and a 23% premium. That deal too was widely regarded as being overly aggressive after Nomura stepped in and bought the entire offering shortly before launch.

The solid demand for the Beijing Enterprises deal indicates that pricing was not an obstacle in terms of getting the deal out the door, however -- indeed, one source said the 2.25% coupon had even been enough to attract a few fixed-income funds to the deal. A key reason for the widespread interest would have been the company's quasi-sovereign status, with the Beijing municipal government owning approximately 59% of the issuer. However, the company is also regarded as a "safe" business with about 70% of its earnings coming from gas distribution and another 20% from its water utility and toll-roads businesses. Although not a utility, its fourth business segment -- breweries -- is also typically a business that is relatively less affected by economic downturns.

Beijing Enterprises' share price has gained 62% from a low of HK$21.95 in late October and finished at a fresh 52-week high on Friday, but analysts believe there is more upside to be had as the demand for gas is growing in China and the company is expanding its pipeline capacity. The company said that proceeds from the CB will be used to finance potential acquisitions in some of its core businesses, but didn't specify. Of the 17 analysts who cover the stock, according to Bloomberg, 13 have a "buy" on it, compared with just two "sell" and two "hold" recommendations.

These attributes were not too dissimilar to those of SK Telecom, and explains why long-only equity investors were interested in participating in both of these CBs.

The credit spread was assumed at about 250bp over Hibor, although some investors were said to have factored in a spread of up to 400bp to include their cost of funding. The shares are quite easy to borrow, resulting in a stock borrow cost of 75bp and investors will get compensated for cash dividends exceeding HK$0.65 per share. At the current share price, this translates into a dividend yield of 1.8%.

Depending on the credit assumption, the bond floor ended up in the 89% to 94% range, while the implied volatility came out in the low 20% range (using an input volatility of 35%).

Perhaps because it was the first international convertible of size out of China in a year -- the most recent one was China High Speed Transmission's $285 million renminbi-denominated CB in April 2008 -- the deal was hotly contested with at least nine investment banks said to have pitched for a piece of the action. However, sources say Nomura and Credit Suisse didn't win the mandate solely on pricing (several other banks were in fact offering the same terms) but also on the back of previous investment banking relationships and capital markets advice. Nomura underwrote a greater portion of the deal and received a larger share of the economics in proportion to that commitment, but the two bookrunners were joint in all other respects.

UBS, which was rumoured to be on the deal the day before the launch, ended up as a co-bookrunner together with HSBC.

The most recent CB by a Hong Kong-listed issuer was Champion Reit's $600 million offering in late May last year.

¬ Haymarket Media Limited. All rights reserved.
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