JPMorgan cooks CB

US investment bank prepares CB for lunchbox provider Fu Ji Food.

Hong Kong listed Fu Ji Food raised HK$600 million ($77 million) after Monday's close from a debut CB. The catering company only listed on the exchange in December 2004, but has been a strong outperformer so far this year, rising 139.74% compared to roughly 25% for the Red chip index.

Investors are said to have liked the deal because it provides diversification away from India - offering a similar yield profile without a the corollary of a massive conversion premium. Year-to-date, there has been relatively little issuance from Hong Kong, which has seen just four deals raising roughly $900 million compared to $4 billion in 2004.

Terms for Fu Ji's deal comprise an issue price of par, zero coupon, three year put at 118.5% and redemption price of 132.769% to yield 5.75%. There is a 13.5% conversion premium to Monday's VWAP of HK$9.034 and a call option after three years with a 130% hurdle.

Marketed terms comprised a conversion premium range of 11% to 16% and yield of 5.5% to 6%.

Underlying assumptions comprise a bond floor of 95.2% based on a credit spread of 400bp over Libor. Implied volatility comes out at 22.5%.

Historic volatility stands at the 35% to 40% level, but is fairly meaningless since there is no borrow and the stock is not even eligible for short selling. The deal also has dividend protection above the 0.5% level.

Fund managers say the deal closed just over two times covered with participation by about 45 accounts.

At its current trading levels, Fu Ji is trading at about 18 to 19 times 2005 earnings. The Shanghai-based company primarily delivers lunchboxes to China's "modern working classes" targetting factories and offices where it can win outsourcing contracts. The company is able to maintain margins around the 40% level because it operates a series of centralised kitchens that are more cost effective than most companies are able to run on a smaller scale in-house.

In what is a hugely fragmented market, the company currently has a 1.5% market share.