Biostime International, a Chinese milk powder company, made its post-IPO capital markets debut on Tuesday with a HK$2.5 billion ($322 million) convertible bond.
Taking advantage of a share price that has tripled in the past year, the Hong Kong-listed company raised zero-coupon finance at a time when interest rates and straight bond yields are expected to edge higher as the US Federal Reserve continues to unwind its asset purchases and the US economy recovers.
Biostime sources its milk powder in Europe and sells at the premium end of the Chinese market, which has allowed it to profit from the toxic-additive scandals at domestic dairy firms and the public’s growing distrust of Chinese food manufacturers.
Baby milk formulas contribute roughly 80% of Biostime’s revenues and the rest comes from probiotic and nutritional supplements, dried baby foods and baby care products. All are likely to see increased demand due to the Chinese government's recent decision to relax its one-child policy and as a result of changes in Chinese dietary habits.
In anticipation of these favourable consumption trends the company’s stock already has plenty of momentum behind it. Biostime shares rose from an IPO price of HK$11 in December 2010 to roughly HK$25 at the start of 2013, and peaked at an all-time high of HK$75 on Monday this week.
The company's convertible bond deal had a conventional structure, with a five-year maturity, a three-year put and a three-year issuer call subject to a 130% hurdle.
HSBC was sole global coordinator, having arranged Biostime’s IPO in 2010. It launched the deal at 5.30pm, after sounding out a group of investors, and went on to market the deal with a conversion premium that ranged from 27.5% to 40% over the closing price on Tuesday and a yield of 1.875% to 2.875%. Both were fixed at the investor-friendly end, resulting in a 27.5% premium and a 2.875% yield.
The implied volatility was 26%, compared to 150-day volatility of 53%, resulting in a bond floor of 95% at a credit spread of 350 basis points (bp) and a relatively generous theoretical value of 104.
A HK$600 million upsize option was available and there was enough demand to exercise it, according to one source, but the issuer wanted to ensure the bonds traded positively and decided against it.
The company is 74%-owned by Biostime Pharmaceuticals, which in turn is owned by Luo Fei, the company’s chairman and chief executive, plus five other directors. The resulting small public float meant that stock borrow was available only at a costly 5%, which some investors reportedly took up. HSBC also offered asset swaps at 350bp, helping hedge funds to enter the deal.
In total, 35 accounts placed orders. The allocation was split roughly equally between outright accounts and hedge funds, with 40% going to the investors who were wall-crossed into the deal early. Most of the buyers were from Europe, mainly due to the deal’s timing.
The deal priced at par and was trading up a quarter of a point at lunchtime on Wednesday, while the stock was down roughly 2%.