China Overseas launches exchangeable into COLI

The up to $850 million deal will remain open until Friday and is paired with a tender offer for its existing exchangeable that matures in May.

As is usually the case, it did not take many days into the new year before the first Asian equity-linked deal hit the market. However, the $650 million to $850 million bond that is exchangeable into shares of Hong Kong-listed property developer China Overseas Land & Investment (COLI) will be adding little, if any, net new supply, meaning some investors will have to wait a bit longer to increase their exposure.

The reason is that the proceeds from the exchangeable bond (EB) will be used to buy back an existing COLI EB that matures in May this year through a concurrent tender. The existing bond is in the money, but none of the bondholders have exchanged it for shares just yet and the entire $500 million are still outstanding.

According to a source, the issuer – COLI’s unlisted parent company, China Overseas Holdings – wants to take advantage of the current high share price to swap its outstanding bonds for new ones that will have an equivalent value but will result in less dilution in case they are to be exchanged into shares.

By combining the new issue with a tender, China Overseas Holdings will also be able to maintain its shareholding in COLI at a minimum of 51%, which it is required to do under certain debt covenants. The parent company currently owns about 53.2% of the Hong Kong-listed subsidiary.

The new issue is open both to existing bondholders and new investors, however.

Equity investors responded positively to the refinancing plan and pushed COLI’s share price 7.1% higher at the start of Wednesday’s trading session. By the lunchtime break it was up 4.9% after falling a combined 7% in the previous three sessions. Other Chinese property developers were also higher on the back of positive sector news, however.

The tender and the new EB were both launched at about 8:30pm on Tuesday Hong Kong time and, like a normal overnight deal, the bookrunners received most of the order indications for the new issue on the night. However, the bookbuilding will technically remain open until 10am London time on Friday, which is when the tender closes. The final terms of the new deal will be determined at that time as well.

This extended offering period will enable the issuer to match the size of the new EB with the amount of bonds tendered. According to a term sheet, investors were to get a preliminary indication of the potential allocation of the new EB before the opening of Hong Kong trading today (Wednesday, January 8) in order to be able to adjust their tender offers accordingly.

The source said late on Tuesday that early indications suggest that a large portion of the existing EB holders will tender their bonds. Immediately before the announcement of the tender, the existing EB was trading at a price of about $136 for each $100 of face value, which indicates that it would cost about $680 million to buy back the entire issue.

According to an announcement, the EB will be bought back either at a fixed price of $136.75 for every $100 of face value, or at the equity value of the bonds plus a premium of seven points, whichever is higher.

Like the outstanding EB, the new deal will have a seven-year maturity but comes with a slightly shorter put option of 4.5 years, compared to five years for the earlier deal. Instead of a call, the issuer has the option to trigger a mandatory exchange after four years, subject to a 130% hurdle.

The bonds are offered with a zero percent coupon, a yield-to-put of 2.5% to 3.5% and an exchange premium of between 50% and 60%. The latter will be set over the average of the daily volume-weighted average price (vwap) for the next three sessions (January 8 to 10).

The premium looks high compared to other Asia ex-Japan equity-linked deals. Indeed, the highest premium on an Asian convertible bond or EB outside Japan in 2013 was no more than 35%, which was achieved by Hengan International on its $700 million Hong Kong dollar-denominated CB in May and by Semiconductor Manufacturing International Corp (SMIC) on its $200 million CB in October. Both those deals had a five-year maturity with a three-year put.

To find a deal with a higher premium, one has to go back to Wharf’s $800 million transaction in May 2011, which set the conversion price 65% above the latest close.

However, the previous COLI exchangeable also came with a 50% premium and the issuer’s good track record with regard to that deal and the fact that investors have made money on it, would make the high premium easier to accept, one source said.

The existing EB is exchangeable into COLI shares at a price of HK$15.93 apiece, while the stock closed at HK$20.35 yesterday. The share price has gained 92% since the previous EB was issued almost seven years ago.

The new issue cannot be exchanged into shares for the first 12 months but, given the high premium, that may not have been on the cards anyway and investors did not seem to worry too much about that, one source said. The existing EB was non-exchangeable for the first three years.

The deal is being marketed at a credit spread of 250bp over Libor, the source said. Technically it is issued by a wholly owned unit of China Overseas Holdings called China Overseas Finance Investment, but it is fully guaranteed by the holding company.

In addition to the tender, China Overseas is also conducting a consent solicitation among the existing EB holders to give the issuer the option to settle all of the existing EBs that will remain outstanding after the tender in cash. Again, this will help ensure that its stake in COLI does not fall below 51%.

Investors who tender their existing bonds will be viewed to have given their consent to the amendment of the terms and will be eligible to receive the consent fee of $0.25 per every $100 of face value. Bondholders who do not wish to tender have to actively decide whether to give their consent by the time the tender closes.

Citi and Goldman Sachs are joint bookrunners for the new exchangeable bond as well as dealer managers for the tender.

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