Chinese juice company issues dim sum convertible

Unlisted Garden Fresh breaks new ground with a Rmb100 million CB denominated in offshore renminbi. The CB is expected to be followed by a Hong Kong IPO in the next three years.

A China-based producer of fruit and vegetable juices that is aiming to list in Hong Kong within the next three years has issued a convertible bond denominated in offshore renminbi. The offering, which was guaranteed by its Singapore-listed parent company, is believed to be the first CB to tap into the offshore pool of renminbi in Hong Kong, based on the limited records that exist for this asset class.

Like the first straight bond to be issued in offshore renminbi, the deal is small – only Rmb100 million ($15.6 million) and because the issuer isn’t yet listed, it was also placed with a small group of investors. However, as shown by the development and popularity of straight bonds denominated in offshore renminbi, also referred to as dim sum bonds, since McDonald’s brought the first such deal by an international issuer in August last year, this is a market that has a lot of potential to grow.

The McDonald’s bond amounted to only Rmb200 million ($29.5 million at the time), but by the end of last year a total of Rmb36 billion worth of dim sum bonds had been sold by 16 different issuers. In the first seven months this year, another Rmb50 billion of bonds from 43 issuers hit the market, according to data from the Hong Kong Monetary Authority (HKMA).

Interestingly, last week the renminbi traded down against the US dollar for the first time since China started to allow it to appreciate just over one year ago. The surprising move all of sudden introduced downside risk to holding the Chinese currency. Until now, the renminbi has been viewed pretty much as a one-way bet, which explains the rapid growth of offshore renminbi deposits in Hong Kong in the past year. As of the end of June, these deposits stood at Rmb550 billion ($86 billion). However, many investors are keen to get a higher return on their renminbi holdings than they can get in a basic deposit account, and demand for alternative products may actually grow if the currency appreciation can no longer be taken for granted.

The issuer of this first CB is Garden Fresh (HK) Fruit & Vegetable Beverage Co. The three-year CB will pay no coupon, but will offer a yield of just over 3.5% since the bonds were issued at a price of Rmb89.5 per Rmb100 of principal. That yield is based on a three-year maturity, although the CB holders have the option to extend the life of the bonds for close to another year in case the IPO were to get delayed for technical or market-related reasons. The bonds will be redeemed at par.

However this is a CB that is intended for conversion at the time the company is going public. Rather than setting a conversion premium at a percentage of the IPO price, as is common with pre-IPO CBs, the conversion ratio is based on a performance requirement and will guarantee the bondholders a certain ownership of the company. The minimum they can get is 6.67%, which will value the company at no less than six times earnings. This is based on a scenario where the company’s net profit exceeds Rmb250 million by 2013. If the net profit is between Rmb200 million and Rmb250 million, the conversion ratio will use a company valuation of 5.5 times earnings and if it falls short of Rmb200 million, the conversion ratio will be based on a valuation of five times earnings.

With other Chinese food and beverage companies trading at price-to-earnings multiples of 18 to 25 times, Garden Fresh’s could quite possibly achieve a P/E multiple of 15 to 20 times at the IPO, which suggests a potential return for the CB investors of 300% to 400%.

Such returns are as high as on private equity deals, and indeed the investors that came into the transaction were for the most part private equity specialists. At the same time though, the CB is guaranteed by a parent company that is listed and cash-rich, which gives a lot of downside protection. The parent company, Sino Grandness Food Industry Group, is a producer of canned fruit and vegetables.

The deal was bought by just four investors, of which two were locked in as cornerstone investors before the deal was offered slightly more widely. According to a source, the buyers comprised two financial institutions, one private equity fund and one family office. They were all based in either Hong Kong or Taiwan.

It was unclear whether Garden Fresh had approval to remit its offshore renminbi proceeds onshore, but the source said that if this wasn’t possible, the company would be happy to convert the proceeds into dollars first. It could then convert them back to renminbi after bringing them onshore. Being an export company, it would have no problem bringing dollars into the country, the source said.

While this will add a bit to the cost of the funds, Garden Fresh would have had to offer a higher yield had it issued the CB in dollars, which means the price of the bond would have had to be lower, resulting in less proceeds. The company will use the net proceeds of approximately Rmb80 million to build two new production facilities in addition to the two it already has.

The company has grown rapidly since it started operations about 18 months ago with average revenue growth of 90% in each of the six quarters. It still sees lots of growth potential, however, since the distributors it uses still only sells its products at about 20% of their retail points.

The CB was arranged by Sun Hung Kai Investment Services.

Australian real estate investment company Agincourt Capital in July offered investors the opportunity to buy convertible bonds denominated in offshore renminbi, but these bonds were to be payable and settled in Australian dollars. This type of structure exists in the straight bond market as well and is referred to as a synthetic bond. These bonds give investors exposure to the offshore renminbi, but doesn’t actually tap the pool of offshore renminbi capital in Hong Kong.


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