Hsin Chong fails to excite CB community

Hong Kong-listed construction company breaks drought in equity-linked deals.

Hong Kong-listed construction company Hsin Chong executed a $100 million convertible on Tuesday, breaking a six-month drought in equity-linked deals from Asia ex-Japan.

Bankers have described 2015 as one of the worst years on record for Asian convertible bond issuance and Hsin Chong will have done little to reverse that trend given its small size and club style syndication.

The last publicly marketed deal from the region came in mid May when Singapore property heavyweight CapitaLand sold a 10-put-seven S$650 million ($493 million) bond.

Neither Hsin Chong, nor its sole bookrunner, China Merchants Securities (Hong Kong), are familiar names in the convertible bond market and the deal also incorporates a non-standard structure. Asian deals typically encompass five-put-three or seven-put-five structures, but first-time issuer Hsin Chong opted for a two-year tenor with put and call options after one year.

The deal was initially marketed with a conversion premium of 10% to 20% and pricing was fixed at the investor-friendly end of 10% to the stock’s close on Tuesday and 9% versus its five-day average. This translates to a conversion price of HK$1.00.

The 6% coupon was fixed at launch and is also high by Asian standards. The bond is puttable at par after one year and also callable on the same date subject to a 130% trigger.

Sources close to the deal said the deal closed covered, but not multiple times oversubscribed given investors are unfamiliar with the credit and the underlying stock is relatively illiquid, trading about $4.06 million on Wednesday. This led to roughly 40% of the deal being allocated to outright investors, 40% to hedge funds and 20% to private banking clients.

The high coupon was said to have attracted a number of high yield bond specialists. But the stock’s low liquidity and limited research coverage combined with the lack of a grey market price is said to have put many hedge funds off.

The lead provided stock borrow for about 40% of the total deal size at a 1% cost, but CB specialists said the absence of much stock borrow on the street made the deal fairly difficult to hedge.

“You’d have to like the stock a lot to take the trade,” one market participant commented.

The deal’s limiting factors meant CB analysts initially valued the deal using fairly wide credit assumptions ranging from 600bp to 1,000bp over Treasuries.

The main benchmark is Hsin Chong’s existing 8.75% senior note due 2018 although it is one year longer than the new convertible, or two years if the put option is accounted for. 

This paper was trading at 650bp over Treasuries when Asia opened on Tuesday. News of the new CB led it to spike out to a bid price of 102.7% and yield of 755bp by the day’s close.

In its own valuation, the lead applied a credit spread of 700bp, equating to a bond floor of 98% and an implied volatility of about 18%.

Some market participants priced in 5% to 10% slippage as the deal potentially dilutes existing shareholders by 14.9% assuming full conversion. However, the stock fell just 1.1% on Wednesday to close at HK$0.90. Year-to-date it is down 9.09%.

There is an upsize option of $30 million, which is exercisable within 14 days of the deal’s execution.

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