CRRC plans record-breaking exchangeable bond

The parent of Hong Kong and Shanghai-listed CRRC Corp is planning a new deal only months after a first equity-linked offering.

Hong Kong and Shanghai-listed rolling stock manufacturer CRRC Corporation is set to come under the spotlight of Asia’s equity-linked market for the second time this year following the announcement of an Rmb7 billion ($1.1 billion) exchangeable bond.

Only two months ago, the Hong Kong-listed entity completed a debut $600 million convertible bond. This time round, it is the parent company issuing debt, which can be exchanged for the A-shares of its Shanghai-listed entity.

Since Baosteel blazed a trail with China’s first onshore exchangeable bond in December 2014, there have been roughly half a dozen deals on the mainland, raising nearly Rmb15 billion.

CRRC’s new five-year offering will be the largest of all, surpassing a Rmb5 billion six-year exchangeable bond by Shanghai Guosheng into Shanghai Construction Group last November.

Exchangeable bond structures offer state-owned entities a way to monetize their equity holdings at a time when the China Securities Regulatory Commission (CSRC) prevents large shareholders from offloading more than a 1% stake in the open market.

For investors, the equity option provides them with a cheap entry point into a stock, which has lost nearly 70% of its value since its Rmb35.55 peak price last April.

CRRC Group currently holds a 64.52% stake in CRRC Corp and the 670 million share deal will reduce this by 2.6% if all the bonds are converted into stock.

The offering is, however, relatively small compared to the stock’s trading volume, equating to 7.5 days based on a three-month average of 90 million shares per day.

One fund manager said the parent is likely to have been tempted by the low rates on offer in China’s domestic bond market. It is also likely to have been attracted by the fact that CRRC’s A-shares are trading at a 62% premium to its H-shares, which means it can achieve a higher valuation from an onshore deal.

On Wednesday, the group said the bond sale has been approved by the State-owned Asset Supervision Commission (Sasac) and is pending CSRC approval.

CRRC’s H-share convertible has performed well in secondary market trading since late January. Sales desks said the five-year deal with a three-put option was indicated at a bid/ask price of 106.8%/107.8% on Wednesday, translating to a yield of -1.356%/-1.545%.

The bond has performed in line with the stock, which has traded up around 15% and outpaced the Hang Seng Index’s 8% gain over the same period. On Wednesday, it closed at HK$7.78 but is still below the HK$9.65 conversion price attached to the equity-linked deal.

In Shanghai, the stock closed at Rmb10.51 on Wednesday, down 18.21% year-to-date compared to a 14.95% fall in the Shanghai Composite Index. Since the beginning of March, however, it has re-bounded 12.6%. 

CRRC was created as a result of a state-directed merger between China CSR Corp and China CNR Corp in June last year.

The state-owned train maker is likely to benefit from rising passenger demand, overseas growth as well as operating margin expansion driven by the cost-saving synergies after the merger, Nomura analyst Patrick Wu said in a report earlier this month.

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