Hidili raises $250 million from renminbi-denominated CB

The Chinese producer of coking coal achieves a coupon of only 1.5%, but offers investors a back-ended yield-to-put of 3.5%.

Chinese coal producer Hidili Industry International Development has raised Rmb1.707 billion ($250 million) from a renminbi-denominated and US dollar-settled convertible bond that took some time to be completed, but featured a coupon of only 1.5% that will keep down the company's annual costs.

Thanks to an additional back-ended yield, investors will still get sufficiently compensated and the CB met with quite a lot of interest. According to a source, the deal was more than four times covered, having attracted a mix of outright investors, who are positive about the demand outlook for coking coal and like the company's "growth by acquisitions" strategy, and investors who were focused more on the technical aspects of the CB. Demand from the latter group was underpinned by the provision of stock borrow by one of the major shareholders.

The CB, which is only the second from Asia this year, comes at a time when there is quite a lot of focus on the coal industry, thanks both to rising coal prices and the upcoming listing in Hong Kong of Mongolia-based coal producer SouthGobi Energy Resources. SouthGobi is a Canadian company that is already listed on the Toronto Stock Exchange, and is attempting to raise about $400 million by selling new shares to investors ahead of its Hong Kong trading debut on January 29.

Hong Kong-listed Hidili offered its CBs with a coupon between 1.5% and 2% and a yield between 3% and 3.5%. And while the coupon was priced at the tight end, the yield was fixed at 3.5%. The bonds have a five-year maturity, but can be put back to the issuer on the third anniversary. There is also an issuer call after three years, subject to a 130% hurdle.

The conversion premium too ended up at best terms for investors, namely 30% over Monday's close of HK$9.68. The premium was marketed in a range between 30% and 40%. Given that Hidili's share price has already increased more than five-fold from a low of HK$1.85 in March last year, and is currently trading just below the 52-week high of HK$10.44 that it reached on January 6, that premium still looks pretty high.

But the stock has traded higher. Shortly after its trading debut in September 2007, Hidili reached its all-time high of HK$15.54 and in May 2008 it moved above HK$15 for a second time. Based on the 30% premium, the initial conversion price will be HK$12.584.

The CB was launched on Monday evening Hong Kong time and, as noted, the book was more than four times covered when it closed later that night. However, there was some price sensitivity around the different terms and the company was left with the choice of whether it wanted to go for a low coupon or a higher premium. According to sources, the decision dragged out somewhat and by the time the chairman had cast his vote in favour of a low coupon, it was too late to go back and check that with the Asia-based investors.

As a result, the stock was suspended from trading yesterday while joint bookrunners Bank of America Merrill Lynch and Citi made sure investors were happy with the final price. One source said that nobody backed out, although some investors chose to reduce the size of their orders slightly.

In all, about 70 investors participated in the trade. The majority of them came from Asia, but there were a few large outright orders from Europe.

Most investors assumed a credit spread of 750bp-800bp and thanks to the shares provided by the major shareholder for hedging purposes -- together with some borrow available in the market -- the stock borrow cost was kept at 1%. Investors will also get compensated for any dividend above HK$250 million in 2009 and above a 30% payout ratio thereafter.

This gave a bond floor of about 92%-93% and an implied volatility in the mid-20s.

About half of the proceeds will be used to repay short-term debt obtained in connection with recent acquisitions and the rest will go towards capital expenditures and future acquisitions.

Hidili has grown massively since its initial public offering just over two years ago, mainly through acquisitions. Its number of mines has more than doubled to 42 from less than 20, and it now has over 600 million tonnes of reserves.

Analysts say it will continue to buy up smaller mines that become available, but in the next two to three years, one of its objectives is also to complete the development of the mines that it has already acquired, and to bring them into the full capacity phase. According to one source, then company plans to increase its annual production capacity to 10 million tonnes over the next two to three years from 3 million tonnes today.

Hidili is based in the Sichuan and Guizhou provinces and focuses entirely on coking coal, which because of its higher heat content, makes it ideal for the furnaces used in the iron and steel industries. While it faces some transportation issues when it comes to moving its high-quality coal from the mountainous regions in Sichuan and Guizhou - especially in a cold and snowy winter like the current one - its location means that it is close to its major customers in Southwestern China. And the southwest is a region where the demand for coking coal is growing fast than the country average.

As a result, CB investors were quite keen on this company, even though it is a debut issuer and a somewhat uncertain credit. 

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