In a clear sign of the renewed confidence that international investors have in the Vietnamese economy, property developer Vincom late Monday was able to raise $100 million from the first ever offshore convertible bond by a Vietnamese company. The bonds have a five-year maturity, but can be put back to the company in November 2011 at par. They are convertible into Vincom's Ho Chi Minh-listed shares from April 30 next year.
The money will be put to work in two new mixed-use development projects in Hanoi that Vincom will be breaking ground for in late December and early next year respectively, and which are expected to take five to six years to complete.
The offering had its fair share of challenges with Vincom being an unrated debut credit, unknown to most international investors. Also, the buyers of the CB won't be able to hedge either the credit or the equity component. On top of that, the deal came on the back of a more than 200% rally in Vincom's share price over the past eight months, including a 35% jump in the past two weeks after news of the CB leaked into the local market. The share price has also almost doubled since Credit Suisse, which acted as the sole bookrunner, started to seriously talk to the company about a deal two months ago.
As a result of the share price movement, Credit Suisse brought the deal on a best-effort price and the conversion premium was offered at just 5%-10% compared to earlier plans for a more "normal" premium in the 25%-30% range. But while this may have looked low at first glance -- especially since the bonds also feature a semi-annual reset -- CB analysts noted that the share price was below the reset floor (80% of the initial conversion price) as recently as last week. And given that the CB would convert into approximately 100 days of trading volume, based on the daily average in the past 12 months (typically it would be less than 20 days' volume), in their view, the comfort provided by the resets is limited.
Even so, the CB attracted enough demand that Credit Suisse decided to close the books at 11pm on Monday night (Hong Kong time) after just one day of bookbuilding. Initially it had planned to keep the books open for three days after the Monday morning launch to allow investors more time to fully understand and become comfortable both with the company and with investing in Vietnam. Credit Suisse also offered to upsize the transaction to $150 million, but the company declined.
"We sought regulatory approval for (a deal size of) $150 million as a buffer, but we decided to stay with $100 million to cap the dilution at a level we were comfortable with," said Thuy Hagan, Vincom's chief investment officer. At the final price, the company will have to issue new shares corresponding to about 10% of its existing share capital.
She added that Vincom had considered other fundraising options in the international markets, including an initial public offering in Singapore and a bond issue, but settled for a CB since the management "strongly believe in the equity story". This deal also wasn't so much about getting the absolute best economics, but about approaching a new group of investors in the international markets. To complement its fundraising needs, Vincom is also planning to issue a Vnd2 trillion ($113 million) domestic bond in the next couple of weeks and, according to the CB term sheet, it may also do a rights issue "shortly thereafter".
The deal was about two times covered by a good mix of Vietnam-dedicated funds, private equity investors and conventional CB arbitrage funds. Since the CB isn't hedgeable, all the investors would have bought the deal on an outright basis, for the equity story. Consequently, sources close to the offering said the 50 or so investors who bought into the deal weren't particularly concerned about valuation metrics, such as the credit spread and the implied volatility. Instead, they focused on the absolute conversion price and most of their work went into getting comfortable with the company's business plan, and its cashflow and liquidity situation.
The bonds, which will be issued and redeemed at par, were offered with a coupon and yield between 5% and 6%, and a conversion premium between 5% and 10% over Monday's close of Vnd108,000. Both were fixed at best terms for investors, resulting in a coupon and yield to put and maturity of 6%, which is low in comparison with the typical Vietnamese bonds that tend to pay coupons in the 10%-12% range. The conversion premium was fixed at 5%, resulting in an initial conversion price of Vnd113,400. There is an issuer call after two years, subject to a 130% hurdle.
Credit Suisse marketed the bonds with a credit spread of up to 1,400bp over the Vietnamese dong swap rate, which at the time of pricing was at 9.7%. Investors will get compensated in full for dividend payouts. Although not really in focus, at that wide a spread, the bond floor came out at 85%, while the implied volatility was in the early to mid-teens, compared with a 260-day historic volatility of 55%.
The bonds, which will be listed on the Singapore Exchange, were quoted at 99.5 to par yesterday in very light volume, while the share price gained another 3.7% to Vnd112,000 -- a record high since the company listed in November 2007.
With Vincom having shown the way, it is possible that other Vietnamese issuers may follow suit and attempt an offshore CB. One source said yesterday that there is a lot of interest and already at least a handful of companies are seriously considering it. However, potential issuers need not only to be fundamentally strong, but also have a management that has the drive to go through a fairly lengthy regulatory process.
Thuy said Vietnam's real estate market is attractive for foreign investors since it is still in the early stages and has great potential to grow. "I am the most bullish on the retail market. It is in its infancy, which is evident by the 100% occupancy rate in our retail centre," she said. "After that comes the residential market, which is why two of our projects will have a significant residential component."
Real estate development in Vietnam rose 9.7% in the nine months to September, according to Bloomberg, which is almost twice as fast as the GDP growth, partly thanks to the government's $8 billion stimulus package.
Some $70 million to $80 million of the CB proceeds will be used for the Royal City project in Hanoi, a mixed use 12 hectare project that it will break ground for in late December, while $15 million to $25 million will go towards the 35 hectare Eco City project where construction will begin early next year.
So far, Vincom has completed two developments -- retail and office complex Vincom City Towers in November 2004 and retail and residential project Vincom Park Place in August this year. It also has two sites under construction in Ho Chi Minh City, the 25-storey Vincom Center, which will open in April next year and will be the first building in the city to offer shopping, living, working, dining, entertainment, relaxation and fitness in one prime central business district location. Across the road from that site it is erecting a 21-storey office tower that will be the largest office building in Vietnam when it opens. Both these projects are funded by bank loans.
Credit Suisse has broken new ground in Vietnam's capital markets before, having also led the country's first, and so far only, sovereign dollar-denominated offshore bond in 2005, which raised $750 million.