US-listed online real estate services provider E-House (China) Holdings was able to complete a $135 million convertible bond offering just before the start of US trading on Thursday, almost 36 hours after the deal first hit the market.
However, the five-put-three deal was downsized from an initial plan to raise $180 million and the bookrunner also gave up a large portion of its fees to re-offer the bonds at a price of 97.5 and make the terms more attractive.
The need to do this suggests investor appetite for CBs from Chinese internet companies is waning after more than $2.7 billion of new supply in the sector since late August. With less than two weeks left until Christmas, investors are also starting to wrap up their portfolios for the year, reducing the pool of potential buyers.
On top of that, E-House’s larger Chinese rival, Soufun Holding, sold $350 million worth of CBs just a week earlier, which may have reduced the desire to invest in yet another deal in the same sector.
As it should, E-House offered more generous terms than Soufun: a coupon and yield of 2.5%-2.75% versus 2% for its larger competitor, and a conversion premium of 30%-35% versus Soufun’s 40%. It was also marketed at a credit spread of 700bp over Libor, while most investors valued Soufun at 500bp to 550bp.
But it wasn’t enough – particularly after Yandex, Russia’s leading search engine that is listed on Nasdaq, launched a $600 million CB at roughly the same time that was perceived as more attractive.
Yandex is a $12.4 billion market cap bluechip that is significantly more liquid than E-House, and a much stronger credit. So, even though it technically came with a lower coupon of 1.125% and a wider conversion premium of 37.5%, investors preferred the Russian deal.
There was also talk of yet another US-listed Chinese company sounding out a convertible with investors while E-House and Yandex were in the market. It too was said to be offering relatively cheaper terms. The Chinese deal did not end up launching last week and in light of the re-offer of E-House, it could be a challenge to get it done before the end of the year.
The source said there was good demand for E-House when sounding out the CB pre-launch and the deal was half-covered within the original terms before these two other deals emerged.
It does not seem to have attracted much additional interest beyond that though and instead of pricing the deal after the US market closed on Wednesday as planned, the bookrunner (Credit Suisse) was forced to revise the terms to match the demand.
But rather than change the actual coupon and premium, Credit Suisse chose to re-offer the deal at 97.5% of the face value, which meant E-House achieved the original terms (at the investor-friendly end) while investors got a significantly more attractive deal. The size was also cut by 25% to $135 million. The deal does have a $15 million greenshoe that could bring the total proceeds to $150 million, if fully exercised.
At the re-offer price, the 2.75% coupon effectively increased to 3.64%, while the 30% premium dropped to 26.75%.
The difference was absorbed by Credit Suisse through its fees. It was unclear what the bank got paid but one source said it did not give up its entire pay check.
Even at the revised terms, the deal was quite thinly covered and, according to the source, only about 20 investors participated in the transaction. Because of a sharp rise in the share price in recent months, outright investors were said to be less keen on the deal and the order book was hedge fund heavy. There was no information about the geographical split.
The CB launched on the back of an 11.1% jump in E-House’s share price on Tuesday after data showed that Chinese home sales rose to a two-year high in November. The gain took the stock to $13.13 ― its highest close since April 2011
The price came off 1.6% on Wednesday when the CB was in the market but then resumed the upward trend. It closed at $13.90 on Friday, which was up 20% on the week and 239% since the beginning of the year. Most of that gain has come since early August when Chinese internet stocks started to regain the attention of US investors.
However, E-House is still well below its record high of $34 that it reached a couple of months after its listing in August 2007 and has only just returned above its IPO price of $13.80. It currently has a market cap of $1.9 billion.
The 30% premium over Wednesday’s closing price of $12.92 resulted in an initial conversion price of $16.80.
Based on a 700bp credit spread, a stock borrow cost of 75bp, a full dividend pass-through and a re-offer price of 97.5, the bond floor worked out at 87% and the implied volatility at 22%.
E-House spent $45 million of the CB proceeds to enter into a zero-strike call option with Credit Suisse that the bookrunner was to use to provide an opportunity for the CB buyers to hedge the equity option. When the company first announced the deal it also said it would spend $20 million to buy back its own shares, which would have facilitated the hedging activities even further and provided additional support for the share price. The press release announcing the completion of the deal did not mention any share buy-back, however.
The rest of the proceeds will go towards general corporate purposes, it said.
E-House was the second US-listed Chinese company to re-offer a CB below par in the past month after YY, a Chinese provider of an online social platform. Contrary to E-House, YY also increased the coupon to 2.375% from an initial range of 1.125%-1.875% before re-offering the deal at 99. The premium was fixed at the low end of the range at 40%.
However, the efforts were not enough and the YY CB was eventually pulled. Similarly to E-House, YY may have been negatively affected by the fact that there was another deal in the market viewed to be more attractive, although the YY CB was offered at pretty aggressive terms and some observers argued it would have been a tough sell regardless of the competition.
The YY CB was arranged by Citi and JP Morgan.