But after a full day of marketing and the inclusion of some extra downside protection, sole bookrunner Citigroup was able to successfully close the deal last night (March 9) and the company got its money.
The five-year bonds will have a zero coupon and will redeem at 126.456% of face value to give a yield to maturity of 4.75%. The conversion premium was fixed at the low end of the indicated range of 25-30%, which gives a conversion price of HK$0.90.
There is a conversion price reset after the first and second year if the share price doesnÆt perform, subject to a floor of 80%. This means the conversion price cannot be set below HK$0.72 after the first year û which is also equal to WednesdayÆs closing price û or, in a worst case scenario, below HK$0.576 after the second year. The reset will be triggered if the average closing price for the 20 trading days before the reset dates (April 10, 2007 and April 10, 2008) is below the conversion price.
ôThis is a common feature on deals such as this one where it isnÆt easy to hedge either the credit or the equity and investors have to buy the deal outright,ö one observer notes. ôIt essentially gives investors a little more protection.ö
There is an issuer call after two years subject to a 130% trigger.
That should be no problem to reach if the share price performance over the past couple of months is to be taken as guidance. Since the beginning of the year, GeelyÆs stock has more than doubled to HK$0.72 from HK$0.325 as sentiment for the mainland auto sector has improved dramatically from last year, when the industry was plagued by concerns of oversupply and margin pressures.
The assumptions included a credit spread of 400bp, a dividend yield of 1.39% and a stock borrow cost of 5%. This gave a bond floor just below 90%, which was quite low and had to be partly compensated by fixing the conversion premium at the low end of the range. The implied volatility is 29%, which compares with a long-term volatility of about 45%.
The 100-day historic volatility is closer to about 65%, however, given the sharp share price gains since the beginning of the year. During 2005, the share price fell 9.1%, although it fluctuated in a range between HK$0.325 and HK$0.54.
If the bonds are converted in full, Geely will have to issue new shares corresponding to about 20% of its issued share capital, which is the maximum allowed under Hong Kong regulations.
The offer attracted about 35 investors and the book was said to have been close to two times covered, according to one fund manager. About half of the deal went to Asia, while European accounts took 30% and US offshore accounts the rest.
Analysts say demand for low-end and mid-sized cars like the ones produced by Geely is especially good, and the company has seen strong sales since October. In January and February combined, sales at its two car making associate companies totallyed 31,650 units, up 89.5% from a year earlier.
One observer said if the company is able to repeat the performance from these first two months during the rest of the year then ôeverybody will be upgrading the stock.ö
The company said it would use the money to increase its investments in its car manufacturing joint ventures as well as its component manufacturing business, which should help boost its earnings.
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