Kingsoft Corp, a Hong Kong-listed software developer, last night became the first company to issue a convertible bond of size in Asia since late May.
The Hong Kong dollar-denominated deal was upsized in full and ended up raising HK$1.356 billion ($175 million).
The deal was well received by both hedge funds and outright investors thanks to a decent coupon and a stock lending facility. And since most Chinese internet technology companies are listed in the US, it offered CB investors in the region a rare opportunity to get exposure to the sector.
It remains to be seen, however, whether it will have the power to re-open the CB market or will end up being a one-off deal before the summer break.
Kingsoft’s CB had a standard structure with a five-year maturity, a three-year investor put and a three-year issuer call subject to a 130% hurdle. It launched with a base deal of about $150 million plus an upsize option of $25 million, albeit in Hong Kong dollars. As noted the upsize option was exercised in full at the time of pricing after the deal was said to be multiple times subscribed.
It was offered with a coupon and yield of 2.5% to 3%, which clicked with outright investors who have had to get used to small coupons or no coupons at all this year. Of the 11 CBs or exchangeable bonds that has priced in Asia ex-Japan in 2013, six has come with a zero coupon, and only two is paying more than 2%.
CapitaLand is paying the third highest coupon this year (1.85%) and that is on a S$650 million ($516 million) seven-year CB with no put.
Kingsoft ended up fixing its coupon at 3%.
The deal was marketed with a conversion premium of 28.5% to 33% over the two-day volume-weighted average price (VWAP), which worked out at HK$13.18. The stock gained 5.5% yesterday, which is likely why the bookrunners chose to use a two-day VWAP. Based on yesterday’s close of HK$13.52, the conversion premium ranged from 25.3% to 29.6%.
The premium too was fixed at the investor friendly end, at 28.5% over the two-day VWAP. This resulted in an initial conversion price of HK$16.9363, which is a level that Kingsoft has never traded at before. However, the stock is up 148% so far this year and yesterday’s close was only 4.1% below the all-time high of HK$14.10 that it hit on June 10.
Kingsoft listed in Hong Kong in October 2007 after raising $99 million in an IPO that was priced at HK$3.60 per share.
Sources said the deal, which didn’t launch until after 7.30pm Hong Kong time, attracted a nicely balanced mix of hedge funds and outright investors and the order book was described as “high quality”.
A group of existing shareholders contributed up to 46.66 million shares towards a stock lending facility that helped bring in the hedge funds. There isn’t a lot of stock borrow available in the market and what is there is quite expensive, one source said. The stock lending facility was available at a price of 75bp and the number of shares was enough to cover about 46% of the upsized deal, which ought to have been sufficient given that the demand was said to be well balanced between hedge funds and outrights.
The CB was marketed with a full dividend pass-through and at a “ball park” credit spread of about 600bp, although some investors were happy with a narrower spread of 550bp, while others preferred to play it more cautiously and use 650bp.
Depending on where in that range they felt comfortable, the implied volatility worked out at about 24% to 25% and the bond floor was 88% to 90%.
The bond floor is quite low for an Asian CB, but one of the sources noted that investors were okay with that because Kingsoft is a liquid stock with a good industry position and a strong supporting shareholder in the form of Tencent, which is one of the largest internet service providers in China. Tencent owned about 15% of Kingsoft at the end of last year, according to the latter’s 2012 annual report.
Beijing-based Kingsoft also has very little debt and hence is viewed as a strong credit. The proceeds from the CB will be used primarily to repay short-term bank loans.
The company’s main business lines are online games (mostly role-playing games), internet security and an office suite of desktop applications. It markets and distributes its products mainly through the internet.
J.P. Morgan and Morgan Stanley were joint global coordinators and bookrunners for the transaction, which means they each did two deals last night. J.P. Morgan also brought the $850 million GDR sale by Taiwan lender Fubon Financial and Morgan Stanley worked on the $100 million block trade in Taiwan-listed contact lens manufacturer Ginko International. The two banks did each of those deals on a sole basis.
Macquarie also had a bookrunner role on Kingsoft, but according to the term sheet only the two global coordinators were taking orders.