Hongqiao attempts to raise $150 million from fifth CB in a week

The Chinese aluminium producer launches an unhedgeable CB with an unpopular upsize option and greenshoe.
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An aluminium smelter in China
<div style="text-align: left;"> An aluminium smelter in China </div>

After a slow start to the year, the convertible bond markets in Asia have perked up in the past week as issuers are trying to take advantage of a demand for new paper among investors. Since last Tuesday no fewer than four deals have hit the market, including a $130 million issue from Indian mid-cap Amtek India that priced late Monday.

However, it still doesn’t really feel like the beginning of a bull market. Aside from Khazanah Nasional’s well-received Islamic exchangeable into Hong Kong-listed Parkson Retail, the deals have either performed poorly or attracted investors with the help of letters of credit and asset swaps in combination with generous terms. What the market needs is a cleanly priced deal that trades well in the aftermarket.

Unfortunately, the latest CB doesn’t seem to fit that bill either. The deal, a $150 million offering for aluminium producer China Hongqiao Group that launched early yesterday afternoon (the stock was suspended from trading from 9am Hong Kong time), had still not been completed late last night and as the bonds were trading at about 98 in the grey market there was speculation that the deal may either have to be re-priced or pulled altogether.

There were several issues that investors weren’t too keen on, including the fact that the deal came with a $50 million upsize option and a $50 million greenshoe. The upsize option isn’t much of an issue since that would be exercised at the time of pricing if there is enough demand, but the shoe can be exercised over a period of 30 days and means that investors won’t know the final size of the issue before deciding whether to invest or not.

There was also some comments about the fact that part of the proceeds will be used to repay a loan provided by Barclays. There was no mention of the size of the loan, but one banker noted that if it wasn’t material in size, it would not have had to be singled out on the term sheet. Investor never really like when the money they invest doesn’t to grow the company, but this was particularly sensitive since Barclays was also the sole bookrunner for the CB.

Other uses of the proceeds include expansion of production facilities and general corporate purposes.

On top of this, there seems to have been a discrepancy between the credit spread of 600bp that the bookrunners were using to market the deal and the view among some of the investors who were suggesting a spread as wide as 900bp to 1,000bp. Also, neither the credit nor the equity option can be hedged, which would typically reduce the demand from hedge funds.

The CB has a five-year maturity, but can be put back to the issuer after three years. It was offered with a coupon and yield between 5.5% and 6.5% and a conversion premium of 25% to 35% over Monday’s close of HK$5.82. This would give a conversion price between HK$7.27 and HK$7.85, which is below the record high of HK$7.99 that the stock hit in mid-April last year.

Hongqiao listed in Hong Kong on March 25 last year after raising $822 million from an initial public offering. The company had initially planned to raise as much as $2.2 billion in January but aborted this first attempt citing volatile market conditions. The IPO was priced at HK$7.20 per share. After hitting the high in April, the share price assumed a downward trend that lasted until October and while it has had a reasonably strong run since early February this year, the stock is still trading below the IPO price.

The deal comes with an issuer call after three years, subject to a 130% hurdle and the CB holders will be compensated for all dividend payments.

The CB was marketed to investors in Asia and Europe and as of early this morning there was still no word on whether the deal had priced and been distributed. But the fact that the bonds were quoted well below par in the grey market, in combination with the fact that bookrunners kept so mum last night does suggest that the deal was struggling.

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