Hengan International raises $700 million from zero-coupon CB

The personal hygiene products company prices an enlarged deal with a 35% premium. It is the biggest CB and the highest premium in the region in two years.
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Hengan sells a range of personal hygiene products in China
<div style="text-align: left;"> Hengan sells a range of personal hygiene products in China </div>

Hengan International Group, a consumer products company, has raised HK$5.43 billion ($700 million) from the sale of a five-year zero-coupon convertible bond, which it plans to use for capital expenditure, refinancing of bank borrowings and general corporate purposes.

Hengan is engaged in the production, distribution and sales of personal hygiene products in China, such as tissue papers, sanitary napkins and disposable diapers, as well as food and snacks products.

It is the biggest equity-linked transaction in Asia ex-Japan (excluding A-share CBs) since Wharf Finance’s $800 million CB in May 2011, Dealogic data show. Hengan’s 35% conversion premium is also the highest since the Wharf deal, which came with a 65% premium.

Hengan was the second CB to hit the market on Monday night, after the company’s stock renewed an all-time high to end at HK$88.95 that day. Most Asian stock markets also climbed, with the Hang Seng Index up 1.8%, as investors were encouraged by rallies in US stocks and housing data from China.

After the transaction, Hengan’s stock ended yesterday’s trading down 0.2%, roughly in line with a 0.5% fall on the Hang Seng Index. The CB traded most of the day yesterday at 101 to 101.5, and closed at 103, according to a source.

The stock has climbed about 27% since the start of the year, while the index is up 3% during the same period.

CapitaLand, a Singapore-listed real estate developer that had launched its Singapore dollar-denominated deal a few hours earlier than Hengan, ended up raising $516 million from the sale of seven-year CBs, which it will use partly to buy back part of an outstanding CB that matures in 2018. On the same busy night, aside from a trio of other smaller block trades, Goldman Sachs sold its final batch of shares in Industrial and Commercial Bank of China (ICBC), raising $1.1 billion.

Hengan’s CB launched with a base deal size of $550 million, with an upsize option of $250 million. Responding to strong demand, the size of the deal was increased by $150 million, which represented about 27% of the base deal. It came with a zero coupon, but was marketed with a yield of between 1.5% and 2%. The conversion premium was marketed at 35% to 40% over Monday’s closing price of HK$88.95.

In the end, the deal was priced with a 2% yield and a 35% conversion premium, which translated into an initial conversion price of HK$120.0825, the investor-friendly end of the terms. There is an investor put at the end of year three.

The order books, which opened around 7pm Hong Kong time on Monday, closed in a couple of hours, sources say, adding that the deal was covered within an hour. It was priced and allocated early Tuesday morning.

The demand was extremely strong, with the book covered twice on the final size, and it was evenly allocated to hedge fund and outright investors, one source says. They were from both Europe and Asia.

Even though it is not rated, the company has the balance sheet and the size and scale of an investment-grade company, and investors like these kinds of stories, the source adds.

The company is also a play on China’s economic growth and rising consumerism, another source notes.

Additionally, CB investors are familiar with the company. In April 2006, Hengan raised HK$1.5 billion through the sale of five-year CBs. The deal, which was jointly led by Deutsche Bank and UBS, was priced with a conversion premium of 50%.

The credit spread for Hengan’s latest deal was assumed at 200bp, and the stock borrow cost was assumed at 50bp, according to sources. The final terms gave a bond floor of around 98% and an implied volatility of around 20%, they say.

The conversion price will be adjusted for dividend payouts that exceed 70% of the net profit in any given year.

The company said in a statement yesterday that the net proceeds from the deal will be applied to finance capital expenditure of the group, refinance a portion of its bank borrowings and for working capital and general corporate purposes. But it added that the directors may choose to use the funds in other ways, which it said would improve the group’s liquidity position, as well as potentially enhancing its equity base and reducing its financing costs.

Deutsche Bank and J.P. Morgan were joint global coordinators and bookrunners for the deal, and HSBC and UBS joined them as bookrunners, according to the term sheet.

For the year ended December 31 last year, the company booked an 8.6% rise in revenue from a year earlier to HK$18.5 billion, and a 32.8% jump in profit attributable to shareholders to HK$3.5 billion, it said in an earnings statement in late March.

The overall gross profit margin of the group increased to 44.9% last year from 39.9% in 2011, thanks to the decrease in raw material prices, optimisation of product portfolio, the scale effect brought by the expansion of the business, as well as the group’s stringent cost-control measures, it said.

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