Brilliance China completes debut CB

Chinese auto manfacturer scores highest ever premium for an equity-linked deal out of Hong Kong and China.

Three weeks after the completion of a $39 million block trade, Brilliance China was back in the equity markets yesterday (Tuesday) with a $170 million convertible via the same lead manager, Citigroup. The company picked a particularly good day to launch its transaction, since China related stocks managed to re-coup last week's losses and push the Red Chip index up 4.42% on the day.

So too, Brilliance China was able to achieve a 37.31% conversion premium to its HK$3.35 close. And although the stock was up less than 1% on the day, it has appreciated 135.9% on the year. At this level, it sets a new record for the CB market out of Hong Kong and China, beating Beijing Datang's 30% conversion premium of early September.

Final terms comprise a five-year deal with an issue and redemption price of par, 0% coupon and three-year put at 102.27% to yield 0.75%. The company had price targets at this level and the main variable was the conversion premium, which was marketed under a 34% to 38% range.

There is also hard no call for two years, subject to a 130% hurdle. Fees total 2%.

Underlying assumptions incorporate a bond floor of 89.9%, implied volatility of 36% and theoretical value of 101.5%. This is based on a credit spread of 140bp over Libor, 0.6% dividend yield, 3% borrow cost and 40% volatility assumption. The borrow cost was set at 3% because the stock trades about $12 million a day and is considered relativvely liquid.

Terms were considerably less aggressive than those of Citic Financial late last week and in line with what would be expected by a cross-over credit. The company has plenty of room to raise debt having recorded a net debt to equity ratio of 18.9% and interest coverage ratio of 8.1 times at the end of 2002.

Brilliance China is unrated, but bankers say there was no asset swap demand in the primary book anyway, with all allocations either on an outright, or long only basis.

Books were two-and-a-half times covered after one hour and seven-and-a-half times after two hours, at which point they closed with participation by 150 accounts. By geography, the deal split 50% Europe, 35% Asia and 15% US.

Investors are said to have liked the deal for two reasons. Firstly, there still appears to be a lot of momentum propelling the underlying market. Secondly the China consumption story is one that has caught a lot of investors' attention this year.

As one banker puts it, "This stock hits all the right investment themes. It's a play on growing disposable incomes, an expanding middle class and access to consumer credit."

The company recently reported better than expected first half figures, with net income up 98% year-on-year and sales of high-end sedans up 117% compared to a 74% sector average. Analysts also have a positive view of the company's joint-venture with BMW, which is expected to break-even for the first time next year. A number forecast that domestically produced BMW's will be able undercut imports by at least 20%.

Within a few hours of pricing, bankers reported a secondary market trading level of 101% to 101.125%.

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