China Power International Development (CPI) has raised Rmb982 million ($150 million) from the sale of renminbi-denominated but US dollar-settled convertible bonds that met with a lot of interest from both hedge funds and outright accounts, allowing the order books to be closed after just one hour. The bookrunners also exercised the $25 million upsize option in full, allowing them to increase the size from $125 million at launch.
Investors were drawn to the deal partly because of the company’s status as a quasi state-owned enterprise, and partly because of a high bond floor, which meant the buyers had to pay less for the equity option. CPI, which is led by Li Xiaolin, the daughter of former Chinese premier Li Peng, is listed in Hong Kong as a red-chip but is backed by one of China’s top five power-generating groups, the state-owned China Power Investment Corp.
The CB has a five-year maturity, but can be put back to the issuer on the third anniversary, for a yield-to-put of 2.25%. That yield is equal to the coupon, which was fixed at 2.25% at launch. There was an opportunity for a back-ended yield on top of that, but after a lengthy discussion between the bookrunners and the issuer late last night, the terms were fixed at the issuer-friendly end.
Hence, the yield ended up at the bottom of the 2.25% to 2.7% range, while the conversion premium was set at 25% over yesterday’s close of HK$1.72 after being offered in a range between 15% and 25%. Even at the wide end, the premium is well below the past four equity-linked deals out of China or Hong Kong, which have achieved premiums ranging from 30% to 40%. However, a CB specialist noted that this was to be expected for a low-volatility energy stock, especially one that has a daily turnover of no more than $1 million.
The premium translates into an initial conversion price of HK$2.15 — a price that the company last traded at in late 2009. During the past 12 months, the stock has traded in a range between HK$1.50 and HK$1.90. It is currently on an upward trend and has risen 13.9% from its 2011 low of HK$1.51 that it reached on February 24. In the past couple of weeks the share price has been supported by reports that China may be about to raise power prices at the point where the electricity enters the grid in some regions to help generators cope with rising coal costs. According to Reuters, this would be the first power price hike since late 2009.
In its 2010 earnings report, which was published at the end of March, CPI said that its power generation in 2011 “is expected to increase moderately in the face of pressure of rising coal prices and an opportunity for tariff adjustment”. It added that the group will speed up its restructuring process and focus on enriching its capital structure.
The CB was about six times covered and attracted about 100 orders altogether, according to a source, but with the pricing migrating to the rich end and the bookrunners trying to allocate quite tight to award investors who came in with large sizes early on, not all of those orders got filled. The demand was said to be split 65-35 between Asia and Europe and to be slightly skewed towards hedge funds. The Reg-S deal was not open to onshore US investors.
Even with the price at the issuer-friendly end, the CB was bid at more than 103 in the grey market in the early hours of this morning, likely supported by the tight allocation and also by the relatively small size. This is CPI’s debut CB and the company also doesn’t have any outstanding dollar debt, so investors who wanted exposure to the Chinese SOE sector might have felt it was an opportunity not to be missed. CPI is rated BB (stable) by Fitch.
The company also stands out by having the highest percentage of installed hydro-power capacity among the overseas listed Chinese power producers. At the end of 2010, CPI had a total attributable installed capacity of 11,585MW, of which close to 22% is accounted for by hydro-power plants. The rest of the capacity is from six coal-fired plants.
The CB was marketed with a credit spread of 400bp and a full dividend pass-through. And with no borrow available in the market, the stock borrow cost was assumed at 5%. At the final terms, this gave a bond floor of 96% and an implied volatility of 20%, which was roughly in line with an historic vol of 18% to 20%.
CPI said it will use the proceeds to fund future capital expenditure, to repay existing bank borrowings and for general working capital.
The deal was arranged by Credit Suisse and Royal Bank of Scotland.