To illustrate, the crossover index û a benchmark for US five-year CDS for crossover credit û closed at a mid-term price of 231bp last Thursday, after reaching a peak of 249bp on July 11. In mid-June, the index dropped as low as 154bp (June 17). As a result, more than $10 billion of global trades have been pulled in the last few weeks, including MISC, Kia Motors, US Foodservice, Banco Schahin, Magnum Coal, Catalyst Paper and Clayton Dubilier.
In executing its deal, Neo-China also had to contend with a degree of weariness for Chinese real estate bonds, brought on by a glut of such paper and because the debt ratings of a number of high-yield Chinese property developers were lowered last month on the back of aggressive land-bank acquisitions. Further, high real-estate prices, and fears of a real-estate bubble in the region, are keeping many investors from coming out to play.
In this environment, many believed Neo-China could not pull off a deal yielding below 10%. But earlier this week, bookrunners released guidance of 9.5% for a bond-plus-warrant transaction in what one source termed ôa convergence of private and public sector structureö. Bonds with warrants are common in pre-IPO funding and in the private sector, but this is reportedly the first time it has been applied in the Asian public bond market.
A target price of 9.5% turned out to be too ambitious, but pricing at 9.75% allowed Neo-China substantial cash-savings relative to the 10%-10.5% yield at which specialists expected a warrant-free, single-B bond to clear. Attracting $600 million worth of orders, the deal was upsized to $400 million from an initial $350 million.
No-one has been able to explain why this successful structure has not been applied before to the Asian public bond market. Through it, investors receive 66,000 detachable five-year warrants for every $100,000 worth of bonds purchased, with a strike price set at HK$1.68, or a 20% premium to the 15-day volume weighted average price of the share prior to the date of issue. Those not wishing to hold equity-linked instruments could sell them back to market-making bookrunners at a very generous price of $4,200 per $100,000 worth of bonds. This ensured the issue was still attractive to pure debt investors, and those who chose this option (roughly 22% of buyers) benefited from a total yield of 10.6%.
Lenders not wishing to sell immediately benefit from the warrants' unusually long duration. This allows investors substantial time to watch developments in the China property markets before the warrants lapse.
It was not to everyoneÆs taste, however. Many investors who spoke to FinanceAsia stayed away from the deal, on the basis that it was surely madness to issue anything in this environment, especially from a currently unpopular sector with a relatively high-risk asset-class. Some simply did not want further exposure to the Chinese real estate sector, while others simply felt uncomfortable with the price. A few felt the issue size was too big, and likely to harm secondary trading due to a supply overhang. Says one investor: ôI liked the credit, the price and the warrants, but the transaction should have been no more than $200 million.ö
But so far, the paper has fared well, with the bond-plus-warrant package trading up from par to 100.625, having reached a peak of 101 on Friday. The bonds themselves have traded up to 96.5 from an implied value of 95.8 - based on the warrant-stripping price of 4.2 - reaching a peak of 96.625, and settling back at 96.5. The warrants, for their part, traded up to 4.5 from 4.2, and settled on Friday at 4.1.
Says one buyer immodestly, "only the educated, sophisticated investor participated in this transaction". A total of 46 investors bought into the deal. Geographic split saw 51% of the bonds sell to Asia, 35% to Europe and 14% to the US. In terms of investor type, 41% of the bonds were allocated to banks, 56% to funds, and 3% to retail.