Hong Kong-listed China Nickel Resources will go ahead and exchange most of its outstanding 10% convertible bonds after both bondholders and shareholders approved the exercise last week. The move will push back its upcoming redemption payments, and by introducing an amortising feature should make it easier for the company to manage its future cashflows.
It will also remove the concerns that China Nickel would not have been able to repay the bonds when they were due to mature in December this year. The CB in question has an outstanding principal amount of roughly HK$1.33 billion ($172 million) and a redemption value of $225 million — a sum that would have been difficult for the company to come up with, given that it had less than $20 million of cash and cash equivalents on hand at the end of last year.
China Nickel, which is involved in the manufacturing of nickel, chromium alloy steel and stainless steel products, reported improved earnings last year, but the operating environment has remained challenging since the financial crisis and nickel prices are still weak. The company’s share price has fallen 69% from a high of HK$1.70 in November 2010 and has also been sliding gradually from this year’s high of HK$0.81 to Friday’s close of HK$0.53. It currently has a market cap of less than $170 million.
According to a source, bondholders representing 97.9% of the outstanding CBs agreed to take part in the exchange, which will replace the existing CBs with new three-year bonds. Some 75% of the principal value will be exchanged into senior secured straight bonds with a 10% coupon, while 25% will be exchanged into a new CB with a 6% coupon and an initial conversion price of HK$0.7834.
The conversion price represents a premium of 47.8% versus Friday’s closing price, but will be reset down to a floor of 75% of the initial conversion price in December, if China Nickel’s share price is trading consistently below the conversion price at that time.
The bondholders accepting the exchange also automatically approved a series of amendments to the terms of the existing bonds, which meant the amendments were passed. That means the maturity of the existing CB will be extended from December 2012 to March 2015. The right to convert the bonds into equity will also be removed and the redemption amount will be lowered to 100% of the principal value from 131.1699%, making the existing CB rather unattractive. Bondholders who didn’t accept the exchange offer, and who represent 2.1% of the existing CB, chose not to vote either for or against the amendments.
Earlier in the week China Nickel’s shareholders also approved the issue of the new convertible bond, paving the way for the exchange offer to proceed. According to an earlier statement, 99.99% of the votes were cast in favour, which was perhaps not too surprising given that the exchange will ease the company’s near-term cash outlays. The introduction of a straight bond will also reduce the potential dilution for existing shareholders, compared with if the company had gone ahead and swapped the entire issue for new CBs.
To get the bondholders to agree to accept straight bonds, the latter comes with an amortising feature that will see the company redeem the high-yield bonds in quarterly instalments starting from March 2013. This means that the bondholders will start to get their money back relatively quickly. They also don’t have to accept a haircut as they will receive the full redemption value of the existing CB — the principal value in the form of new bonds and the difference between the principal value and the redemption value in cash.
The company will benefit from the extension of the maturity by more than two years to March 2015, the lower conversion premium that makes it somewhat more likely that the new CBs will be converted into equity, and the amortising schedule that will make the upcoming payments more manageable. According to a source, the company believes it will now be able to cover the repayments with the cashflow from its operations.
The price of China Nickel’s CB bounced to about 102 from 80 to 85 when the company announced in March that it was planning to restructure its outstanding CB, and towards the end of the exchange period last week it was trading at around par. Once the results of the exchange offer became known on Friday the price edged up to about 103, according to a source.
The share price didn’t react much, gaining just one cent to HK$0.53 from HK$0.52.
J.P. Morgan was the consent solicitation agent and was also responsible for the exchange offer.