Greenfield structure for Greentown China

Mainland property developer deploys innovative pre-IPO CB structure.

Chinese property developer Greentown China Holdings has raised $150 million from an unusual pre-IPO CB via JPMorgan.

The private placement transaction represents the second time in just over a month that an Asian issuer has used such a structure and bankers believe there are more to come. It follows a highly structured $151 million pre-IPO CB for Indonesia's PT Sulfindo in December and is the first of its kind from China.

Greentown is said to have liked a pre-IPO structure because it enables the company to raise and deploy funds that can improve earnings and hence the valuation it might be able to achieve at IPO. Likewise, this type of financing means company management will not be subject to the same kinds of demands for operational influence that often accompanies private equity money.

From an investor standpoint, bankers believe the structure is also particularly appealing to hedge funds because it enables them to make a sizeable investment with the benefit of downside protection. Typically, hedge funds are also the first to be squeezed out of the allocation process at IPO in favour of long only funds.

Greentown'sd deal incorporates a $130 million five year CB with a three year put and a $20 million private equity component, which helps increase the attractiveness of the total offer. The shares were sold at a price, which values the company at $1 billion, equating to five times 2006 earnings. All of the five to 10 investors who bought the bonds also took a portion of the share sale.

The CB was split 50-50 into mandatory and non-mandatory bonds, both of which are senior, unsubordinated and unconditional. They are also secured by first priority mortgages on 51% of the issued shares in the company, as well as on 51% of the share capital of a wholly owned subsidiary through which Greentown conducts its property operations, offering additional protection for the investors.

The $65 million mandatory bond is made up of two tranches, which have a coupon of 10% until maturity or the listing date, whichever come first. Both tranches are convertible into company shares at a 9.75% discount to the offering price in a qualified public offering (QPO).

The QPO may incorporate both an IPO and a follow-on sale, after which the public free float of the company will be a minimum $300 million. Each sale will need to be at least $150 million.

The difference between the $40 million tranche A and the $25 million tranche B is that tranche A must be converted into shares that will be sold as part of the QPO, while tranche B holders have more flexibility. These options include: converting the bonds and keeping the shares for a minimum of six months in the hope that the share price will go up; selling the bonds back to the company at a price, which will ensure an annualized internal rate of return of 20%, or hold on to the bonds for a minimum of six months at a lower annual coupon of 8%.

If the regulators do not allow the conversion shares to be sold as part of the IPO, holders of both tranches can choose to convert and keep the shares, or to put the bonds back to the issuer at a premium.

The $65 million non-mandatory bonds can be converted six-months after the listing date and at any time thereafter at a conversion price equal to 104% of the IPO price. The non-mandatory bonds will bear an annual interest of 10% until the listing and 6% thereafter. If not converted, they will be redeemed at par at the five-year maturity.

The IPO, which will amount to at least $150 million, is expected in 2006. To alleviate potential concerns that a listing will not happen, investors have the right to require the company to redeem the bonds if there is no IPO in the next 18 months at a price which includes three-year's accrued interest - effectively penalizing the company if it does not come to market.

There is also a general put-option allowing them to sell back the bonds to the issuer on the third anniversary at face value plus accrued interest.

Given the mainland government's clampdown on bank lending to the property sector - strangling funds to all but the largest players - Greentown is a perfect example of the kind of Chinese company that can be expected to use highly structured fund raising alternatives such as pre-IPO CBs to achieve project financing and strengthen their balance sheets before going public.

"Just when issuers need capital, the attention from domestic and foreign funds in the region are focusing more and more on these more structured transactions," says Johnny Chen, an equity-linked origination banker at JPMorgan.

And he adds, "They need to be highly structured because of the nature of the businesses that need funding in China and the level of protection investors require in order to invest." He further notes uncertainties regarding repatriation of funds, definition of assets and land use rights as part drivers of this trend.

A residential property developer focused on the high end of the mainland market, Greentown has expanded from its initial base in Hangzhou in the Zhejiang Province and is now regarded as a national player with substantial operations in the Yangtze River Delta, including Shanghai, as well as in Beijing, Anhui, Hunan and Xinjiang.

The group currently has 67 property projects either underway or planned for the next five years with an aggregate saleable gross floor area (GFA) of 6.9 million square metres, including nine in Shanghai and four in Beijing. This will add to its 21 completed projects, which have an aggregate GFA of approximately 1.3 million square metres.

In terms of land bank, the company ranks fourth among mainland property developers listed in Hong Kong after China Vanke, China Overseas Land and Guangzhou R&F Properties.

Part of the $124 million in net proceeds will go towards repaying a $24 million bridge loan plus interest from JPMorgan Chase Bank that was taken up in July 2005. A further $70 million will be used to pay the outstanding land premiums for future development projects and the remaining $29 million will go towards working capital and general corporate purposes.

Greentown posted a net profit of Rmb 445.8 million ($55.2 million) in 2004 and Rmb221.1 million in the first half 2005 on revenues of Rmb2.73 billion and Rmb989.5 million respectively.

The Company's chairman, Song Weiping, owns 54% of the group and his wife Xia Yibo holds 7%. Executive vice chairman and general manager Shou Bainian owns the remaining 39%.

Their respective interests are held through their wholly-owned BVI-incorporated investment holding companies Delta House, Profitwise and Wisearn - a corporate structure which will allow the company to list in Hong Kong as a red-chip.