China LotSynergy raises $75m for mobile expansion

Mobile gambling in China. What could be hotter? The provider of lottery systems attracts strong outright demand to seal convertible deal.

Former penny stock China LotSynergy, a lottery systems provider listed in Hong Kong, shrugged off recent market volatility on Tuesday as it successfully sold a HK$580 million ($75 million) convertible bond.

The company pushed ahead with its deal despite the sharp recent fall in its share price as CB investors kept up their strong interest in new Asian issuance. LotSynergy shares have come off so much that its conversion price of HK$0.93, which represented a premium of more than 20% to its Tuesday close, was still lower than its March high of HK$0.95.

The deal had a standard structure with a five-year maturity, a three-year investor put option and a three-year issuer call option subject to a 130% hurdle. It launched with a base deal of about $75 million plus an upsize option of $25 million (though the stock trades in Hong Kong dollars).Even so, conditions today are much better than they were for most of last year — and in the case of LotSynergy things are considerably better given the stock’s extraordinary rise since late last year.

The company started life as WorldMetal, an online metals trading platform that traded for pennies on the Growth Enterprise Market before it moved into the lottery business and changed its name in 2005. Those who were around at the time might remember a brief buzz around the company, but it didn’t last long and the shares changed hands for around 10 cents as recently as September.

Outside of Macau, China’s gaming market is limited to so-called social welfare lotteries that use their profits to do good works. LotSynergy supplies lottery machines into this market but the renewed investor interest in the stock has been spurred by new regulations that allow lottery providers to enter the mobile market.

The company, which recently signed a deal to offer lottery tickets through Minsheng Bank’s smartphone app, will use the proceeds to improve its mobile technology and pursue more tie-ups.

LotSynergy launched the deal after the market closed on Tuesday with talk of a 4% to 5% coupon and a fairly wide conversion premium of 20% to 30%. With the shares closing at HK$0.76, that gave a target price range of HK$0.91 to HK$0.99.

Lau Ting, the company’s chairman, agreed to provide 229 million shares (worth roughly $20 million) for investors to use as a hedge, at a cost of 2%. The limited supply of borrow meant that hedge funds made up only 30% of the book in the end.

Investors used a credit spread of 700bp to 800bp and with the implied volatility in the mid-20s this produced a bond floor of around 91%. The bond was said to be trading up at around 103 in Wednesday trade.Outright investors are often shut out of small deals by their own investment rules but the trifecta of China-mobile-gambling was enough to attract outright money into the book, including a large bid from China Construction Bank. There was nonetheless some price-sensitivity and the lead banks (Barclays and Credit Suisse) ended up pricing the deal toward the investor-friendly end of the range, with a 5% coupon and conversion premium of 22.37%.

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