(This story has been corrected to note that the final deal size is $150 million, not $200 million.)
Rumours that a Hong Kong-listed retailer was looking to issue a convertible bond had been doing the rounds for a week and yesterday evening they proved correct when Maoye International launched and priced a HK$1.17 billion ($150 million) five-year deal with a three-year put.
The Hong Kong dollar-denominated Reg-S deal, which was increased from a base size of $125 million, was the third CB to price in Asia in the past seven days and the second this week, suggesting that momentum is finally starting to build in a market that has been rather quiet this year. As of last Friday, there has been $17.9 billion worth of CB issuance in Asia year-to-date, although that includes two multi-billion dollar trades by Bank of China and Industrial and Commercial Bank of China. Excluding those two, the volume is a mere $8.3 billion, which compares with $12.7 billion in financial crisis-marked 2009 and the record $30.1 billion raised in 2007.
Encouragingly, the Maoye transaction was the second CB in a row to be completed without either stock borrow or asset swaps, following Korean telecommunications firm LG Uplus’s $300 million Korean won-linked CB on Monday. However, bankers believe that with the exception of a few hot sectors – retail consumption being one of them – and for companies with a very good underlying equity story, investors will continue to require some form of hedging possibility on most deals.
A department store operator in China, Maoye seemingly qualified for the former as the demand was strong enough to exercise part of the $75 million upsize option. About 50 investors participated in the deal which was arranged by J.P. Morgan. About 70% of the demand was generated from outright investors, which was no great surprise given the lack of stock borrow to incentivise the hedge funds. Indications were that the bonds were bid slightly above par shortly after pricing, although it was unclear whether there actually were any trades last night – not too strange considering that the deal was only launched at about 7.30pm Hong Kong time and priced just after 10pm.
Investors would have been encouraged by the same positive fundamental drivers that have pushed Maoye’s share price 49% higher in the past four months, although these gains likely also contributed to the fact that the deal was priced at best terms for investors. The buyers would have been particularly keen to keep down the conversion premium which was offered at 23.2% to 33.4% over a reference price of HK$3.42.
Interestingly, the reference price didn’t correspond to either the latest closing price – which was HK$3.51 – or a volume-weighted average price, but seemed to be a random number picked to achieve a particular premium or conversion price. Investors seemed to have mostly ignored this, however, and based their modelling on the premium versus yesterday’s close, which at the low end of the range (where it was eventually fixed) worked out to be 20%.
The final premium gives a conversion price of HK$4.212 -- a level that the stock has yet to reach. It is currently trading as its highest level since its trading debut in early May 2008.
The coupon/yield-to-maturity was fixed at 3% after being offered in a range between 2% and 3%. The coupon and the yield are the same as the CB is both issued and redeemed at par.
The bonds come with an issuer call after three years, subject to a hurdle of 130%.
They were marketed at a credit spread of 500bp, an assumed stock borrow cost of 5% and full dividend compensation. This gave a bond floor of 92% and an implied volatility of 23%, according to a source. The latter compared with an historic 30-day vol of about 30%.
The company said the proceeds would go towards working capital and future projects and acquisitions.
On September 7, Chinese property developer Shui On Land priced a renminbi-denominated, but US dollar settled, $300 million equivalent CB via Standard Chartered that was increased to $400 million last Friday. The deal came with a synthetic stock borrow facility, which drew hedge funds into the deal and allowed the issuer to achieve the highest premium for an Asian CB in 2.5 years.
The earlier mentioned CB for LG Uplus was arranged by Morgan Stanley.