Hang Lung makes CB history

The Hong Kong property company is believed to have become the first ever convertible issuer to re-open an existing transaction.

Completed under an accelerated bookbuild yesterday (Thursday), the group has added a further HK$1 billion line of paper ($128 million) to its outstanding HK$2.25 billion deal ($289 million). There is also a HK$200 million greenshoe, which could bring the overall deal up to the HK$3.45 billion mark ($443 million).

Under the lead management of Credit Suisse First Boston, which has once again underscored a reputation for being the most consistently innovative CB house in Asia, the deal was priced at 101% plus accrued interest (101.57%). All terms remain exactly the same as the original deal of early March, which was priced with a cash coupon of 3.4%, a conversion price of HK$9 (an 11.1% conversion premium at launch), hard no call for two years and thereafter subject to a 115% hurdle, plus a three year put at par to yield about 60bp through four-year Exchange Fund notes.

Underlying assumptions for the tap have shifted slightly in recognition of the deal's secondary market trading pattern and at the new pricing level, equated to a bond floor of 94.5%, theoretical value of 109.6% and implied volatility of 13.1%. This is based on a credit spread of 135bp over Hibor, dividend yield of 5.1%, volatility assumption of 30% and 500bp stock borrow cost.

The main pricing barometer for the deal was naturally the secondary market level of the outstanding issue and what impact news of a new line would have on its performance. Not surprisingly the promise of new supply and the added dilution drove down secondary levels from a bid/offer price of 106.25% to 107.25% pre-announcement to 103% to 104% post announcement.

Pricing was set at 101% principally because it was felt that investors would not pay more than seven points for an equity option in a company where there is no borrow, but is moving into the money as the underlying stock closed yesterday exactly in line with the conversion price. The original deal had 6.1 points of downside.

Demand for the deal was strong, with books said to have closed 10 times oversubscribed (excluding the greenshoe) and a 95% participation rate from investors that had participated in the first deal. With interest from just over 100 accounts, there was said to be a geographic split of 30%/70% between Asia and the rest of the world.

Investors were said to have liked the new deal because Hang Lung's original deal had established strong secondary market momentum and many accounts were keen to top up their exposure to a sector and country which has not typically offered much in the way of issuance. The convertible market is also notoriously illiquid because bonds quickly get bedded down or stripped, making it difficult to deal in size.

The main negative is the dilutive impact of the new bonds on the old and beyond that the effect on the underlying stock. Since the original deal represented a dilutive impact of about 8.5% to the company's issued share capital, the new deal brings the total to the 12.5% mark pre shoe and represents an even larger proportion of the free float. In terms of trading days, observers say that it represents about 70 to 90 days volume.

Year-to-date, the stock is up 11.8%, but much of the spurt has occurred since the beginning of April, over which period it has moved up from about HK$7.25 to a HK$9 close on Thursday.

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