Machinery company Lonking Holdings issued $135 million worth of convertible bonds (CB) on Thursday night. The company raised the cash in an attempt to proactively manage its balance sheet in view of an outstanding CB that is likely to be redeemed next year.
The company's prior debt commitments helped to shape the structure of its latest CB. In 2007, the company issued a $289 million CB that is puttable in April next year. Since those bonds are so out-of-the-money it is likely that they will be redeemed. In the past year, when bonds were trading at extremely low prices, the company bought back a large chunk of the 2007 CBs, leaving approximately $150 million outstanding.
Lonking knew exactly how much money it needed to raise from the new sale in order to prepare itself for the redemption. As such, it went out with what was effectively a fixed-price deal. The bonds reach maturity in 2014 and were priced with a zero coupon and a 22.2% conversion premium, which was the bottom of a range that went all the way up to 30%. Sources said that the company wanted a conversion price of HK$7, and that's what it got.
The company was able to pull off a zero coupon for two reasons, according to sources close to the deal. Firstly, investors are interested in the company's equity story: as a company producing construction equipment it is well placed to benefit from China's stimulus package, which has a focus on infrastructure projects. And although much of the stimulus sentiment might already be priced into the company's share price, in the next stage of the economic recovery, property development will take off again, which will again boost the need for construction equipment.
The second reason for the zero coupon is that investors were said to be confident in the company's credit structure. Due to its previous CB issuance and the subsequent buy-back, investors are already familiar with the company.
The deal closed with 20 accounts in the book. The vast majority, around 90%, were long-only investors from Europe. In fact, the deal was launched late at night to target the long-only CB investors, who mostly reside in Europe.
The bond has a credit spread of 750bp above Libor. The bond floor is 92.8%. The implied volatility was 25.5% compared to a historical volatility of between 70% and 80%.
Fujian-based Lonking is one of China's largest producers of building machinery, and it is the largest producer of wheel loaders. Credit Suisse has an "outperform" rating on the company. In a July research note, the Swiss bank predicted that the company's interim results will produce a strong boost in margin improvement.
Sales volume growth, however, will not meet expectations: "As Lonking's products have more demand from the mining sector, whose fixed asset investment growth was much weaker than infrastructure in 1H09, Lonking's loader sales volume dropped by 30% year-on-year to 13,290 [units], or 46% of our previous FY09 assumption," said the note.
The convertible bond was arranged by Bank of America Merrill Lynch.