Hong Kong property and hotel group Far East Consortium last night raised HK$800 million ($103 million) from a Hong Kong dollar-denominated convertible bond, becoming the first company in Asia to tap the equity-linked markets this year.
The bonds, which mature in five years but can be put back to the issuer two years after the settlement in early March, was increased from $750 million, making partial use of the $150 million upsize option after the offering was more than two times covered. In fact, one source noted that the momentum after launch was stronger than for some of the later CBs in the fourth quarter, which relied more on the pre-launch wall-crossings. And this was the case even though the deal didn't hit the market until about 7.30pm Hong Kong time, about an hour or so later than is usually the case for CBs for Hong Kong-listed companies.
The issuer may still use the remaining $100 million of the option at a later stage.
But while investors were happy to submit orders, they were also quite price sensitive, and both the yield and conversion premium were fixed at best terms for the investors. This is perhaps not too surprising for the first CB in a while. The terms were also viewed as somewhat aggressive to begin with, particularly perhaps the coupon and yield-to-put, which at below 4% were seen as a good deal for a company with a market capitalisation of just $700 million, a fair amount of leverage and only a little bit of stock borrow. The share price has also had a strong run since the beginning of last year, gaining about 150%, and the stock is currently trading at a 52-week high.
The coupon was offered in a range between 3.125% and 3.625% and priced at the top of that range. Because the CB will be both issued and redeemed at par, the coupon and the yield will be the same.
The conversion premium was fixed at 25% over yesterday's close of HK$2.79 after being offered in a range between 25% and 30%. This will give a conversion price of HK$3.49. The deal features a call after two years, subject to a 130% hurdle.
According to sources, the majority of the early demand came from outright investors, but by the time the books closed at around 11pm HK time, the order flow had evened out and the deal was said to have been allocated to a mix of hedge funds and outright buyers. More than 30 investors participated in the trade.
The bonds were marketed by the joint bookrunners, Credit Suisse and Deutsche Bank, at a credit spread of 550bp over Libor. This pitched Far East Consortium in between Hong Kong-based Champion Reit, whose five-year credit default swaps trade at around Libor plus 280bp, and Chinese property developer Hopson Development Holdings, whose five-year CDSs are at Libor plus 800bp, although with a two-year put, Far East Consortium should trade quite a bit tighter than the five-year guidance.
Assuming a 1.75% stock borrow cost -- there is a little bit of borrow available in the market and a major shareholder was also leding some shares for hedging purposes -- a dividend protection above a 1% yield and a 5% stock slip, the implied yield came out at 24.5% and the bond floor at 94%.
Far East Consortium has been listed in Hong Kong since 1972 and is about 40%-owned by the Chiu family. The company has been expanding quite aggressively both in Hong Kong and China in recent years, perhaps most notably through its three- and four-star hotel business which it started to build in 2003 when the market was suffering due to Sars.
The company is set to almost double its hotel portfolio by 2011 with the addition of nine new hotels currently under development. Five of these are in Hong Kong and four in mainland China. The total number of hotel rooms will increase to 6,413 by the end of 2011 from 3,246 at the end of 2009. The company's hotel portfolio, which also includes five hotels in Malaysia, is primarily based around three brands - the Dorsett, Cosmopolitan and Cosmo.
It also currently has 14 residential and commercial property projects under development, including seven in Hong Kong, four in China and three in Australia. According to the term sheet, the proceeds from the CB will be used for business developments, including further land acquisitions, and to finance ongoing developments.
Far East Consortium is the first Hong Kong property company to bring a CB since Champion Reit raised $600 millon in May 2008, although Shun Tak Holdings, which has exposure to Hong Kong real estate in addition to its property and tourism-related assets in Macau, sold $180 million worth of Hong Kong dollar-denominated CBs in September last year.
Interestingly, though, all four of the CBs that have been issued so far this year, including two in the US and one in Europe, have come from property companies, perhaps suggesting an increasing need for capital as the global economy is picking up and making the developers more confident to push on with their projects. Whether this will remain a trend remains to be seen, although for sure, bankers are predicting more follow-on issues from Chinese developers this year and with share prices having rallied quite strongly, there is certainly scope for CBs to become a preferred instrument -- both by issuers and investors.