Pacific Basin Shipping has raised $125 million from a six-year convertible bond in an effort to help boost its balance sheet and manage upcoming liabilities.
Strong stock markets in Hong Kong buoyed the convertible bond issue, which is the second in one week following Taiwanese touch-screen manufacturer TPK Holdings’ $383 million concurrent zero-coupon convertible bond and equity sale on April 1.
Pacific Basin’s convertible has a six-year maturity and four-year investor put with an issuer call after four years, according to a term sheet seen by FinanceAsia. It offers a 3.25% yield with a conversion premium of 37.5% to the April 8 closing price of HK$2.97 per share.
Goldman and HSBC launched the deal with a base issue size of $125 million. The book closed multiple times covered, with over 50 lines participating in the book, according to a source close to the deal. Strong equity markets coupled with rock bottom interest rates made the convertible an appealing option for investors, hence the decent demand, the source noted. “Obviously the market backdrop was conducive [for the convertible],” the source told FinanceAsia.
There was some borrow available in the market, and the source noted that a number of hedge funds were keen to hedge Pacific Basin. “[However], Pacific Basin, being a repeat issuer, was cognisant of that,” the source said. “They favoured allocations towards long-only investors. And as a result, the stock was well behaved this morning.” It was trading at above par as of mid-afternoon on Thursday, when allocations were still being finalised.
Outrights made up the majority of the book, around roughly 60%, while hedge funds took up the remainder. It was fairly top-heavy, with the top 10 investors accounting for 60% of the book. Geographically, Asian investors made up the bulk of the deal, although the source noted there were some large orders from Europe as well.
Proceeds from the convertible note will go towards boosting the dry bulk shipping company’s balance sheet, as well as helping the company manage its upcoming liabilities. Pacific Basin has two outstanding convertible bonds due to expire — one in 2016 and one convertible in 2018.
The $125 million secured from the most recent convertible bonds — which expire in 2021 — will allow the company to meet upcoming obligations while taking advantage of good terms in the low-interest rate environment, the source said.
Pacific Basin raised $123.8 million in a six-year note in September 2012. It also issued equity-linked notes in 2007 and 2010.
Pacific Basin is one of the world’s leading owners and operators of modern handy-size and handy-max dry bulk vessels. Two years ago, the company said its fleet, including new builds on order, consisted of more than 230 vessels directly servicing blue-chip international customers.
It’s been a tepid start to the year for equity-linked deals. Some $1.69 billion has been raised via convertible bonds so far this year up to April 9, significantly lower than the $2.49 billion raised in the same prior year period, according to Dealogic data. Shanghai Electric Group raised $974 million in Shanghai in early February, the largest deal in Asia ex Japan, followed by TPK Holdings’ issue in March and Cromwell Property Group’s $169 million equity-linked note in January, according to Dealogic.
But following TPK’s successful convertible bond last week, sources are optimistic that the Asian convertible bond markets may be making a comeback, buoyed by strong stock markets and a continued low interest-rate environment.
“I think market conditions have been favourable despite some recent volatility,” the source said. “The last two days represented a perfect window for issuers to hit the markets. Market conditions were conducive on the 9th, and the issuer was savvy enough to understand that to allow some flexibility, they did some work prior to the Easter break.”
Goldman and HSBC launched the deal on April 8 following a 7% rise in Hong Kong’s Hang Seng Index since March 26. It crossed the 27,000 mark on April 9 for the first time since January 2008, invigorated by the Hong Kong-Shanghai stock connect programme. It spiked to 27,838.47 early April 9 before settling at 26,926.93.
“Equity markets are relatively buoyant. There was a heavy rally into the close yesterday,” the source told FinanceAsia. "And in addition, while we expect rates to go up, it seems the Fed is pausing. They will remain relatively low and below historical averages. The pitch to issuers is simple — while interest rates are still low, it makes sense to stick to coupons at current levels while share prices are up.”
A-share markets are trading at premiums — the benchmark Shanghai Stock Exchange Composite Index surged 22% in the past month. The A-shares of large brokers Citic Securities and Haitong Securities meanwhile have jumped 25% and 39% in the same time period, respectively.
Companies’ A-shares are more expensive than their H-shares — Haitong’s A-shares are currently trading at 28 times 2015 earnings, while its H-shares are trading at 19.7 times 2015 earnings. Citic Securities’ A-shares meanwhile are currently trading at 28.5 times, only slightly more than its Hong Kong-listed shares, which are at 26.6 times, according to Bloomberg.
This has encouraged mainland investors to come to Hong Kong stock markets in droves via the Shanghai-Hong Kong Stock Connect, hence the recent spike. Trading volumes on the Hong Kong Exchanges and Clearing totalled 44,637,745 on April 9, nearly 400% higher than April 2’s trading volumes of 9,075,569.