Huiyuan Juice pushes last week's CB issuance above $1.3 billion

The $150 million deal prices at best terms for investors, but still achieves a 30% conversion premium.
Huiyuan Juice had a 50% share of China's juice market last year
Huiyuan Juice had a 50% share of China's juice market last year

China Huiyuan Juice Group on Friday raised $150 million from a five-year convertible bond, which it will use partly to refinance an existing CB that has about $65 million left outstanding and that is set to mature in June. The remainder of the proceeds will go towards general working capital.

The deal came at the end of a busy week in the Asian CB market with a total of $1.325 billion of new issuance and three other offerings having priced before it. Two of those deals came at aggressive terms, but with very different outcomes. Agile Property Holdings attracted an enthusiastic response and was able both to upsize and to fix the conversion premium at the mid-point of the range, while hotel operator Shangri-La Asia struggled to get much traction. A small number of anchor orders probably saved that deal, but according to sources, the bookrunners (BOCI and HSBC) still had to offload a portion of the bonds below par the following day.

Perhaps to ensure Huiyuan Juice avoided the same fate, the bookrunners made sure the entire deal was covered before launch. However, this meant it was always going to be difficult to move the terms away from the wide end and, not surprisingly, the deal priced at best terms for investors.

However, that doesn’t mean it came cheap. In fact, the implied volatility actually priced through the 100-day realised vol, making this one of the richest deals in the market. While this reconfirms the appetite for CBs, it also suggests that investors have shrugged off the troubles that plagued Hong Kong-listed Huiyuan Juice some six months ago when it ended up in breach of the financial covenants on two outstanding long-term loans, forcing it to ask for waivers from its lending banks. The company, which is about six times leveraged, also had to renegotiate the covenants to fit with its new circumstances, but even after successfully doing so, its share price remained under pressure.

After hitting a 12-month low of HK$4.74 at the end of February, the share price finally made a noticeable turnaround and by last Friday it was up 10.5% from that low.

The five-year deal comes with a three-year put option and was offered with a fixed coupon of 4%, which some observers viewed as slightly tight for a non-investment grade issuer and a deal that is largely unhedgeable, both with regard to the credit and the equity option. There is an issuer call after three years, subject to a 130% hurdle.

It was marketed with a yield between 4.5% and 5%, and a conversion premium ranging from 30% to 35% over Friday’s closing price of HK$5.24. Both were fixed at the investor-friendly end, resulting in a yield of 5% and a premium of 30%.

Premium ranges appear to be migrating higher and bankers note that with deals like Agile pulling off aggressive terms — including a conversion premium of 40% — and still trading well in the aftermarket, issuers’ expectations with regard to the conversion price are rising. And it seems Huiyuan Juice pulled it off too, with the CB trading at about 102.5 in the secondary market yesterday, while the share price fell only 0.4% to HK$5.22. The fact that there is almost no stock borrow available might have helped a bit, as the buyers of the bonds weren’t able to go short the stock.

Manufacturers of products targeted at Chinese consumers are generally in favour, given the country’s increasing wealth and rising disposable incomes, and investors like Huiyuan Juice for its 50% market share of the juice market in China. The company posted a 30% increase in revenues last year and was able to turn its Rmb100 million loss in 2009 into a net profit of Rmb181 million.

And while the deal was covered by a small core group of investors who decided to invest in the CB after making a visit to one of the company’s production sites earlier in the week, other buyers did come into the transaction as well. In the end slightly more than 50 investors were said to have participated, comprising a mix of hedge funds buying on an outright basis and traditional outright investors. The total demand reached about $450 million, or three times the size of the base deal, but the bookrunners still decided not to exercise the $50 million upsize option in connection with the pricing.

The CB was marketed at a 650bp spread over Libor, a 5% stock borrow cost and a dividend protection above a 1% yield. At the final terms, this resulted in a bond floor of 91.5% and an implied volatility of 28% — above the 100-day historic vol of about 23%. However, the shorter-term historic vol is closer to 28%.

Credit Suisse and Royal Bank of Scotland led the deal on a joint basis. However, RBS was added only a few hours before the term sheet went out, while Credit Suisse was responsible for arranging the site visit earlier in the week and for making sure the deal was covered at launch. According to a source, the Swiss bank also took the bulk of the economics.

That said, RBS worked on three of the four CBs last week, suggesting it is making good use of its lending relationships to increase its footprint in the equity-linked space. Aside from Huiyuan Juice, it was a joint bookrunner on Agile’s $500 million transaction together with Standard Chartered, Morgan Stanley, HSBC and Barclays Capital, and acted as a bookrunner on the $175 million CB issued by Suzlon Energy, the Indian manufacturer of wind turbine generators, alongside global coordinator Macquarie.

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