Kerry Properties issues convertible after hitting record high

A scarcity of Asian CBs so far this year and a good track record lead to healthy demand for the Hong Kong dollar-denominated deal.
Kerry Properties last night issued $300 million worth of Hong Kong dollar-denominated convertible bonds, which achieved a 35% conversion premium on a day when the stock finished at a new record high.

Even so, the issue was multiple times covered, according to a source, who noted that the poorer than expected issuance of CBs so far this year has added to investor appetite. The fact that Kerry has an investment grade rating (BBB-) and is viewed as a bluechip within the Hong Kong real estate space also likely helped draw buyers, but even more importantly the developer has an outstanding convertible that was issued in March 2005 and which is deeply in the money û a fact which would have carried a lot of weight with CB investors.

The final order book was said to have contained just under 50 investors, including all the usual suspects from Asia, Europe and the US.

The new paper has the same five-year maturity with no put-structure as the first CB, as well as a zero coupon. JPMorgan also acted as the sole bookrunner for the second time, although this time the issue was said to have been heavily contested by several banks û especially since there has been rumours flying around for the past two weeks that Kerry was about to raise fresh funds either through a CB or a straight equity placement.

The fight for the mandate likely contributed to the quite aggressive terms and it was no surprise that the yield ended up at the wide end of the indicative 2.4% to 3.2%. The bonds were offered with a fixed conversion premium over the Monday close of HK$39 and with a fixed size of HK$2.35 billion (i.e. there was no greenshoe). They were issued at par.

According to a market source, the bookrunner offered asset swaps at 65 basis points and the stock borrow cost was assumed at 2.5%. There is also a dividend protection that kicks in at a yield above 1.8%.

This gave a bond floor of 91.2% and an implied volatility of 30.7%, which compares with a 260-day vol at 33%. While this is certainly not cheap, the company did make the most of the demand for Asian CBs and the current strong market which saw the Hang Seng Index finish at a new record close yesterday after adding 444 points in yet another liquidity-driven rally.

While quite volatile, KerryÆs share price has also been on an upward streak for the past year to the extent that investors who bought the stock at the beginning of 2006 have already doubled their money. And sentiment for the stock remains positive amid low Hong Kong interbank rates and a strong economy. Yesterday, it gained 3.7%.

According to analysts at Macquarie Securities, inflation is also poised to return, partly driven by the strength in the renminbi which is now trading slightly above parity to the Hong Kong dollar.

In a research piece published last week, the analysts argue that developers with exposure to the high-end residential market, including Kerry Properties, will be the main beneficiaries to this.

ôWe are generally not believers in residential property companies trading at premiums to NAV over the long term. However, in short term bursts it is possible and can be supported. With the expectation of price growth and a unique set of circumstances, we believe the market leaders (in Hong Kong) can and will trade at premiums in 2007,ö they say.

Kerry didnÆt specify how it was planning to use the money from the CB, saying only that it would go towards general corporate purposes.

This was only the third convertible by an Asian issuer this year. So far IndiaÆs Era Construction has raised $60 million from a five-year bond with a forward price structure through Citigroup and Hong Kong-listed Hopson Development has issued $225 million equivalent of renminbi-denominated three-year bonds. Both deals were done last week.
¬ Haymarket Media Limited. All rights reserved.
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