While the large number of new initial public offerings in the market is clearly getting a lot of attention from investors and bankers, these deals are by no means detracting from business in other parts of the capital markets. In fact, the demand for the IPOs so far seems to have inspired a pickup in the issuance of convertible bonds as well.
On Monday two Chinese companies, both in the consumer retail sector, came to market with Hong Kong-dollar denominated CBs, taking advantage of the current appetite for consumption-related stock. Both deals were well received to the extent that they could be upsized and both of them traded up yesterday, which is clearly good for the CB market and bodes well for other issuers that may be considering a deal of their own.
Hengdeli Holdings, a retail and wholesale distributor of branded watches, raised HK$2.5 billion ($322 million) from the sale of five-year CBs that can be put back to the company after three years. The deal was originally launched at a base size of HK$1.95 billion with an upsize option of HK$680 million, and while the demand was strong enough to increase the deal size by the full amount, at the final terms it was unable to issue more than HK$2.5 billion. That’s because it would have gone above the limit of 20% of share capital that the company can raise without shareholder approval.
Roughly around the same time, Intime Department Store sold HK$1.941 billion ($250 million) of three-year CBs that were upsized in full from an original deal size of about $200 million.
The Intime deal, which was arranged by Bank of America Merrill Lynch, Morgan Stanley and UBS, achieved slightly better terms, including a higher conversion premium, partly because the controlling shareholder entered into a stock lending agreement for 75 million shares with two of the bookrunners to help stabilise the stock borrow that was already available in the market. That would have made the deal more appealing to hedge funds, although a source said the final demand was still “healthily weighted” towards outright investors. Intime is also a somewhat more liquid stock than Hengdeli.
According to the source, there had been a lot of reverse inquiries from investors who were interested in Intime stock after Warburg Pincus sold just over one-third of its stake in the company in late August, raising $133 million at a 7.1% discount. By the time the CB was launched after the market close on Monday, Intime’s share price had risen 12.3% since that deal and was trading just 10 HK cents below the record high close of HK$10.50 reached last Friday.
The CB was covered in less than an hour, and while some market watchers were pointing to the fact that the deal was offered just below par in the grey market during the bookbuilding, others said that selling appeared to be done mostly by one player that was shorting the deal. In any case, the bonds traded above par after pricing and late yesterday afternoon they were quoted at 100.4 to 100.6. In all, the deal was about three times covered.
That said, the deal did come at best terms for investors, with the coupon fixed at the top of the 1.25% to 1.75% range and the yield coming at the top of the 3.5% to 4% range. The conversion premium was fixed at 28% after being offered between 28% and 33%, for an initial conversion price of HK$13.31.
Hengdeli achieved a lower conversion premium of 23.5%, but was on the other hand able to push both the premium and the coupon slightly inside the best terms. The conversion premium was offered in a range between 20% and 30% over Monday’s close of HK$4.01, but the company was said to have been happy with the 23.5%, as that translated into a 30% premium over the 20-day volume-weighted average price (VWAP). It gives a conversion price of HK$4.9524, which, like for Intime, is a record level for this stock. Hengdeli hit a 2.5-year high of HK$4.04 on Tuesday last week, although this is still a bit below the record high of HK$4.75 that it hit in early 2008.
The coupon was fixed at 2.5%, or the mid-point of the 2.25% to 2.75% range, while the yield to put was set at the top of the 3% to 3.5% indicated range. J.P. Morgan and Standard Chartered were the joint bookrunners.
This deal too was heavily oversubscribed and attracted more than 150 investors, allowing the order books to close after just 1.5 hours, a source said. The bonds were underpinned by core outright investors, but surprisingly, since there is no stock borrow available in the name, the final demand was split 50-50 between outrights and hedge funds. However, the company is a familiar name with investors, having already issued a CB, and the fact that the company counts a number of luxury brands among its shareholders, including the Swatch Group and the LVMH Group, the world’s largest luxury goods conglomerate, does seem to add to the attraction of the stock.
As of yesterday afternoon, the CB had traded up to 102.75-103.
Hengdeli was marketed at a credit spread of 500bp, which was tighter than the 600bp used by Intime. This surprised some observers who argued that Intime was at least as strong a credit. However, based on a 500bp spread, a 5% stock borrow cost and protection for dividend payout of 35%, the implied vol came out at 25.5% and the bond floor at about 93%.
Aside from a credit spread of 600bp, Intime assumed a 1% stock borrow cost and a full dividend pass-through, which gave an implied vol of 26% and a bond floor of 91%.
Hengdeli said it will use the proceeds for business expansion, including acquisitions, and for general corporate purposes. Intime too will put the money towards expansion, but will use some to repay existing debt.
Hengdeli’s share price dropped 6% to HK$3.77 in the wake of the deal yesterday, while Intime fell 3.7% to HK$10.02.