Fufeng Group sells Rmb820 million of international CBs

The MSG producer holds above par in the secondary market, reversing a recent trend that has seen several CBs trade lower after pricing.

Hong Kong-listed Fufeng Group on Thursday evening raised Rmb820 million ($120 million) from a renminbi-denominated, but US dollar-settled, convertible bond that was well received by investors -- so well in fact that it was able to hold above par, reversing a recent trend that has seen several new deals fall below par in the secondary market. The positive aftermarket trading came even though the share price fell 3.75% on the day.

Sources referred to the company's strong market position as the number one producer of monosodium glutamate (MSG) in China and strong earnings growth history as key attractions. Although, the fact that the chairman was lending shares to help investors hedge the equity option of the deal, would also have gone down well with hedge funds.  

MSG is big business in China, Japan and South Korea where it is widely used to improve the flavour of cheap food and snacks. But Fufeng also makes other food additives derived from refined corn, including xanthan gum, which has numerous uses within the food industry as well as industrial applications. For example, it can be added to cold dressings to make them pour better, to hot sauces to prevent separation and keep the temperature, and to ice cream to prevent the formation of ice crystals. But it can also help prolong the life of certain products and can be used as a thickener and stabiliser in medicine, cosmetics and hygiene products, or to make products like pesticide and porcelain. The printing and dying, paper-making and mine drilling industries are also big users.

The five-year deal, with a put at year three, was offered with wide coupon and premium ranges, as the company was said to be trying especially for as high a premium as possible. However, with most recent CBs having priced at the investor-friendly end, predictably that is where many investors chose to place their orders for this deal as well.

According to a source, the deal was covered in about an hour and attracted close to $340 million worth of demand during the three hours that it was kept open. More than half of that came at the low end of the 20% to 30% premium, which in combination with the fact that the company wanted to prioritise outright investors, meant the deal couldn't really price anywhere but at the investor-friendly end. So, the premium was set at 20% over Thursday's closing price of HK$5.86 and the coupon at 4.5%, after being offered in a range between 3.5% and 4.5%.  

The company initially wanted no more than 20% of the deal to go to hedge funds, so as to limit the amount of shares that the chairman had to lend. However, the nature of the demand didn't quite match those wishes and the company had to settle for a 70-30 split between outright and CB-focused hedge fund. About 40 investors were allocated bonds. The upsize option of Rmb205 million wasn't immediately exercised.

The joint bookrunners, Citi and Royal Bank of Scotland, marketed the bonds with a credit spread of 750bp over the swap rate, although most investors were using a wider spread of 800bp to 900bp. At 800bp, the bond floor worked out at 93.1% and the implied volatility at 20.6%.

At the end of Asian trading Friday, the CB was bid at 100.5.

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