Golden Eagle issues convertible six months after its IPO

The company becomes the second in two days to issue a CB at fixed terms and with a re-offer range.
Golden Eagle Retail Group has raised another HK$1 billion ($129 million) for acquisitions and working capital by selling five-year convertible bonds with a three-year put only six months after completing its $206 million Hong Kong IPO.

The sale was arranged by ABN AMRO Rothschild and came only a week after the IPO lock-up ended, suggesting the China-based department store operator may have some funding needs in the near future. ABN was also one of the two bookrunners for the IPO together with Goldbond Securities.

The transaction was the third Asian CB in two days and like the deal brought by Hynix Semiconductor, the Golden Eagle bonds were launched at fixed terms and with a re-offer price range. According to sources, this was prompted by an aggressive bid put forward by JPMorgan which initially landed it a joint bookrunner role on the deal after ABN AMRO Rothschild had already been appointed as the sole arranger.

Apparently JPMorgan had some difficulty delivering on its original terms, however, and was subsequently dropped again. Even so, the issuer still wanted to pursue the deal at the more aggressive terms at which point ABN AMRO Rothschild decided to buy the deal at fixed terms and launch it below par.

Thanks to an offer to provide asset swaps, which increased the attractiveness of the deal, the bank was able to retain some of its fees even though it priced at the low end of the indicated range of 99% to par.

Having been sold at a re-offer price of 99.25%, the bonds traded up to about 100.5% yesterday, however, suggesting that perhaps the bank was being a bit too conservative.

Insiders say there are distinct differences between the Hynix and Golden Eagle transactions from an arranger's perspective. Hynix was a benchmark transaction at $471 million and the company is a repeat capital markets issuer which made it less of an issue for the arrangers to give up some of the fees to get the business. Golden Eagle, on the other hand, is a small- to mid-cap issuer that brought a smallish deal. To be joint books on that kind of transaction - especially one that has to be reoffered - makes less sense say the insiders.

The zero-coupon bonds were launched after the Hong Kong market closed on Wednesday (September 27) with a fixed yield of 4.95% and a conversion premium of 30% over the HK$4.94 close. The share price had surged 4% during the day, which made the execution at those terms slightly more challenging, but when the order book closed after about three hours, the deal was just under three times covered at the final price, one source says.

Adjusted for the re-offer price, the bonds will provide an effective yield to put of 5.2%, making them somewhat more attractive. The put price is equal to 115.8% of face value, while the bonds will redeem at 127.7% if not converted before that. There is an issuer call after three years, subject to a 130% hurdle.

About 50 investors, mainly CB specialists, participated in the deal which was allocated roughly 50% to Europe, 25% to Asia and 25% to offshore US accounts.

The underlying assumptions included a credit spread of 275bp, a divided yield protection above 1% and a stock borrow cost of 5%. The bookrunner provided asset swaps for 40% of the deal, but in the end many investors bought the bonds outright and not all of that was taken up.

The bond floor came out at 94.1%, which at the final price puts the cost of the equity option at about 5bp over three years, which according to one observer can be seen as ôa reasonable outcome".

The implied volatility was 26.5%, compared with a 100-day volatility of 50%. However, the stock experienced a sharp rally shortly after listing before taking quite a big tumble with the rest of the market during the global equity market correction in May which exaggerated those numbers. Volatility is in fact on a declining trend with the 50-day volatility at 40% and the 30-day at 30%.

However, since there is no stock lending available, the volatility trend would not have mattered that much to investors, who would have been more interested in the equity story.

Having recovered from the dip in May, Golden EagleÆs share price closed at an all time high of HK$4.96 on August 30 and based on WednesdayÆs close it is up 57% since the IPO. The stock was suspended Thursday pending an announcement related to the CB issue.

All the six analysts that cover the company, according to Bloomberg data, have a buy recommendation on the stock although target prices range from HK$5, which suggests virtually no upside, to a hefty HK$6.26.

Underpinning the companyÆs growth story is ChinaÆs booming middle class, which is serving as the engine for mid- to high-end consumption spending. About one month ago, the company posted a net interim profit of Rmb134.9 million ($17 million) which marked a 40% improvement over the result for the first half last year. This is pretty much spot on analystsÆ expectations at the time of the IPO for a full-year profit of about Rmb275 million.

After opening a new store in Xian in April, Golden Eagle now has seven department stores with three more in the works that will start commercial operations by the second half of 2008.

Also helping to underpin the demand was the fact that this was the first convertible for a Chinese retail play, thus giving specialised CB investors their first chance to buy into a sector that has been one of the ôhottestö stories around in the straight equity space for more than a year.

The need to raise cash so soon after the listing likely stems from the fact that 75% of the IPO consisted of secondary shares provided by the companyÆs Chinese American chairman and CEO Roger Wang. While he was to use $85 million of the $137 million he raised to repay a loan given to him by the company in an attempt to clean up the books before the listing, it is likely that this prevented the company from raising any more primary capital at that time.

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