Joint bookrunners Citic Capital Markets and JPMorgan priced a $150 million convertible for Citic Financial Holdings (CIFH) after Friday's close in Asia. The deal marks the fifth new entrant to the Hong Kong convertible universe so far this year following transactions by Panva Gas, Beijing Datang, China Travel and Star Cruises.
Having bid the deal out on a competitive basis, the group was able to secure extremely aggressive terms and included some of the losing bidders in the syndicate line-up. Alongside the two leads, ABN AMRO was a joint-lead, with Citigroup and HSBC as co-leads.
Terms comprise a five-year final maturity and a par in par out structure with a coupon and yield of 0.25%. The conversion premium came at the mid-point of a 23% to 28% indicative range to settle at 26.5% to the stock's HK$3.375 close.
Year-to-date the stock is up 55%. However, as a result of the poor performance of the Hong Kong equity market at the end of last week, it is now slightly down from a high of HK$3.60, to trade at 1.6 times price to book.
The transaction also has a three-year put at par and a three-year call subject to a 130% hurdle. In addition, there is a $30 million greenshoe.
Underlying assumptions comprise a bond floor of 89.9%, implied volatility of 33.5% and theoretical value of 101%. This is based on a credit spread assumption of 110bp over Libor, 1.5% borrow cost and volatility assumption of 35%.
The dividend language is more complicated than many recent deals, since the group recently paid out a high dividend to mark its 10th year listing anniversary and the stock currently yields 4.75%. Under the term of the offering, investors are protected to the higher of either a 57% pay-out ratio, or a dividend per share that is based on a CAGR of 20%. For 2003/4, this is set at HK$0.113.
Two aspects of the transaction stand out. Firstly, there is very little opportunity for investors to extract much value given that implied and historic volatility are almost flat to one another.
Secondly, the credit spread appears aggressive in the light of an outstanding $300 million July 2006 bond issue by Citic Ka Wah Bank, CIFH's major asset. Citic Ka Wah's lower tier 2 deal has a Baa3/BBB- rating, one notch below the bank's Baa2/BBB senior rating. And given the rating agencies’ policy to drop holding companies one notch down, CIFH also has a Baa3/BBB- implied rating.
The July 2006 deal was bid at roughly 110bp over Libor on Friday. Investors would normally expect a pick-up of at least 30bp for a CB asset swap, but did not get one. However, observers report that books closed two-and-a-half times covered, with the deal trading up to 100.25% to 100.5% in the immediate aftermarket.
About 50 accounts participated in total, with a geographical split, which saw 60% placed in Europe, 25% offshore US and 15% Asia.
Investors' reception to the deal appears to demonstrate continuing momentum propelling Greater China stocks. And CIFH has more momentum than most in its sector. From its ranking as one of Hong Kong's smaller listed banks back in 2001, Citic Ka Wah jumped into the top five in January 2002 thanks to its take-over of HKCB.
Since then, its unlisted parent Citic Beijing has re-organised all of its Hong Kong financial services companies under a holding company structure encompassing Citic Ka Wah Bank, Citic Capital Markets (25% stake) and Ka Wah Asset Management.
Given its stated ambition to create a Greater China financial services giant, many also believe the parent stands poised to inject its Mainland operations into the vehicle.
In particular, this would mean Citic Industrial Bank, with which Citic Ka Wah has a joint-venture to launch an RMB credit card during the fourth quarter.