New World Development prices $768 million CB

The Hong Kong property conglomerate issues a seven-year, no-put convertible as the Hong Kong stock market powers ahead to a new high.
The flood of property-related convertibles is not letting up despite signs that the market is getting somewhat saturated with this type of paper. But last nightÆs offering by New World Development did at least provide some diversified exposure for investors since the issuer was a Hong Hong-based bluechip developer as opposed to yet another Mainland-based mid-cap real estate company.

The deal will also be easy to hedge both with regard to the credit and the equity, making it interesting for both technical and outright investors.

The HK$6 billion ($768 million) CB has a seven-year maturity with no put, giving it an usually long effective life. While this is positive for the company in terms of it having secured long-term funding, it does add potential risk for investors.

Given that and the recent heavy issuance in property sector CBs and placements - $3.25 billion worth in the past month - the pricing at the wide end of the indicated ranges was no big surprise.

ôThere has been so many real estate companies coming to market over the past month that investors require a few more attractive terms,ö an observer notes.

One CB analyst called the final terms fair rather than attractive, and argued that any other price would have made the deal expensive. For one, the company still has ôfairly stretched financial ratios,ö the analyst says, estimating a pro forma debt-to-Ebitda ratio of 6.8 times post-deal.

The deal was launched after the Hong Kong stock market rallied 2.5%, or 511 points, to a new record close of 20,979 points yesterday (May 14). The gains came amid record high main board turnover of HK$95.0 billion ($12.2 billion). New World added a much more modest 0.2%, however, and has in fact fallen in four of the past six trading days. Still, the stock is up about 24% since the beginning of March.

Often referred to as a property conglomerate, New World Development is also active within contracting and infrastructure, transportation, telecommunications and the operation of department stores, hotels and restaurants.

The conversion premium was fixed at 35% over yesterdayÆs seven-year high close of HK$19.84 after being offered in a range of 35% to 45%. The premium falls at the low end of the premiums used on recent CBs by Hong Kong-listed issuers, showing some restraint on the part of the company which is no doubt aware that several of the recently completed CBs are still trading below par.

Like New World Development, several of the other issuers have also seen their share prices gain quite significantly over the past six weeks but that hasnÆt stopped them from going for higher conversion premiums. Of the 13 deals that have come to market over the past month, eight have had a conversion or exchange premium of 40% or above and four (three of which trade in Hong Kong) have been as high as 50%, which matches the record for a Hong Kong-listed issuer.

The seven-year maturity, no-put structure of the New World Development deal also makes its 35% premium look all the more reasonable.

The yield to maturity was set at 3.60%, which marked the upper end of an offering range starting at 2.35%. Even at the wide end, the yield still gives the company a cost of debt that is below that of US Treasuries of the same maturity û suggesting a good deal for the company.

The bonds have a zero coupon and were issued at par. There is a call after five years, subject to a 130% hurdle. The term sheet also indicated that there was a HK$1 billion greenshoe, but sources said last night that this was a typing error and maintained the deal had been launched without a greenshoe.

The deal was covered at the HK$6 billion size about 4.5 hours after the 7pm launch Hong Kong time, which resulted in joint bookrunners Merrill Lynch and Morgan Stanley deciding to close the books there and then. According to market sources, they had initially indicated that they may keep the offer open until today (May 15) to allow Asian investors another look as the stock will be suspended from trading either way. But this was deemed unnecessary following a surprisingly strong inflow of orders during the evening which allowed the deal to be distributed in full.

Still, there wasnÆt much spare demand for the offering, which accounts for about 8% of the company or 45 days trading if fully converted, and most investors were said to have got what they asked for. About 60 investors submitted orders, with good participation from both CB specialist funds and hedge funds as well as some high-quality long-only funds. Among the latter category there were some quite large orders, says one source. About 60% of the demand came from Asia, 35% from Europe and the remaining 5% from the rest of the world.

The underlying assumptions include a credit spread of 135 basis points over Hibor, a dividend yield protection that kicks in if the payout ratio exceeds 40% of the net profit excluding exceptional items, and a stock borrow cost of 50 basis points. This gave a bond floor of 85% and an implied volatility of 30.5%, which compares with the 100-day volatility at 41%.

The previous CB by a Hong Kong-based developer came in January when Kerry Properties issued a $300 million convertible with the help of JPMorgan. New World DevelopmentÆs 77%-owned subsidiary New World China sold $325 million worth of renminbi-denominated CBs a week ago, but that company has all of its business in China, meaning it doesnÆt count as a Hong Kong developer even though the parent is based here. The New World China deal, which was brought to market by Deutsche Bank, is one of the issues that have struggled recently and it had to be re-priced with a higher yield before it could be completed.

While the relatively infrequent issuance by large-cap Hong Kong real estate developers may have ensured that yesterdayÆs deal got more attention, the company told investors that part of the money will by used to fund property acquisitions in China. The remainder will be used to pay Hong Kong land premiums.
¬ Haymarket Media Limited. All rights reserved.
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