A well-designed structure is the formula for a successful trade and that was illustrated in the case of China Overseas Holdings, which printed a whopping $1.5 billion exchangeable bond into shares of Hong Kong-listed subsidiary China Overseas Land & Investment (COLI) on Thursday.
The seven-year/four-year put exchangeable bond due 2023 was guided at a bid/ask of 100.5/100.875 at launch late on Wednesday before strengthening to about 101 in secondary market trade on Thursday.
Equity linked specialists are no doubt extremely familiar with the company and the credit given that China Overseas Holdings is a repeat issuer in the asset class.
The parent company of China’s largest residential developer by market value first rolled out a $500 million deal in 2007 and that was followed by a $750 million transaction in January last year.
Bankers familiar with the transaction said the issuer has seized possibly the final window to execute a deal ahead of the US Federal Open Market Committee meeting next week.
Tender offer premium
When the deal hit the street late on Wednesday it was marketed at a base issue size of $1.2 billion with an upsize option of $300 million. Even at the base size it was already the biggest equity linked issue in Asia since 2010 when China Unicom sealed a $1.84 billion offering.
Similar to the issue last year, the deal was structured with a concurrent tender offer for COLI’s existing $750 million exchangeable bond due 2021. Even assuming all of the existing bondholders roll over their old paper, the new issue is still a large trade of $750 million on a fully upsized basis.
That seemed to be of little concern as bookbuild went on as market participants appeared to welcome the new offer. The new deal was "very well oversubscribed" and it was said the majority of the existing bondholders have tendered their bonds, according to sources familiar with the trade.
To entice bondholders to accept the tender, the leads have specially designed an early bird system whereby bondholders would be paid a total of 150 basis points over the last quoted 2021 bond price of 121.75 if they chose to tender before Thursday morning.
One market participant described the tender as a no-brainer for existing bondholders because the offer is double the 75bp yield spread between the old and new bonds. The new bond has a yield-to-put of 2.75% versus the existing bond at 3.50%, although it has a slightly longer put option of 4.5 years.
Bondholders who chose to tender were literally getting another 100bp premium as the new bond traded up on secondary market on Thursday.
This effectively implies bondholders who chose to tender could enjoy a premium of 175bp by extending the put date by 1.5 years.
Completion of the new issue is subject to a minimum of 67% of the existing bonds tendered at a bondholder meeting scheduled for January 4.
For the issuer it is clear that it benefits from raising additional proceeds while pressing down the yield offered to investors.
One source told FinanceAsia that China Overseas Holdings is raising approximately $600 million in proceeds from the fully upsized $1.5 billion issue after deducting the buyback offer for the existing bond as well as the tender offer premium.
It has also benefited from a tighter dividend protection clause where conversion price adjustments will be made only when COLI has a dividend payout ratio of more than 40% in any specific financial year. For the existing bond, adjustments to dividend are subject to a payout ratio of 40% or a 2.5% dividend yield, whichever is lower.
Perhaps the biggest benefit for the issuer is resetting the strike price to a much higher level to avoid dilution caused by conversion of the exchangeable bonds.
The new deal was marketed at a 50%-60% premium range over a reference price of HK$27.05 before settling closer to the investor-friendly end at 53.42% when bookbuilding ended. That translates to an initial exchange price of HK$41.5, or about 25% above the old bonds’ HK$33.1 strike price.
COLI shares have surged to as much as HK$32.06 in May following the rally in Chinese stock markets and were only 3% shy of that strike price.
Conversion is not favourable to China Overseas Holdings because it will dilute its 61.18% stake in COLI to 58.34%. Under certain debt covenants it is required to maintain at least 51% interest in the Hong Kong-listed unit.
COLI’s new exchangeable bond was well oversubscribed with roughly 125 lines in the final book, allowing the leads to fully exercise the $300 million upsize option.
A source said there was substantial demand from new investors for the deal because of its large size, while some of the existing bondholders have also increased their positions.
Underlying assumptions from the leads were a 97.1 bond floor based on a credit spread of 200bp over Treasuries, which was tighter than the previous issue at 250bp-275bp. Based on the spread the new paper has an implied volatility of about 27 compared to 31 for the existing bond.
The new deal was finalised with a 2.75% yield-to-maturity, a put price of 111.54 and a redemption price of 121.07. It also came with a four-year issuer call option.
Citi, Goldman Sachs and HSBC were active joint bookrunners of the exchangeable bond issue. Bank of America Merrill Lynch, BNP Paribas, BOC International and CICC were joint bookrunners.