Panva Gas prices CB

The first convertible for a Gem listed company and P-chip is priced.

Morgan Stanley led a small but significant $50 million transaction for Panva Gas on Friday. First listed on the Gem market in April 2001, the company has come to increasing prominence over the past year following a strategic tie-up with Hutchison Whampoa for whom founder Thomas Ou used to work and strong earnings growth. Both have underpinned a strong share price performance, with the stock doubling in 2002 and up 19% year-to-date.

After a two day marketing period, the deal was priced towards the outer end of its indicative range late on Friday Hong Kong time. Terms comprise a five-year deal with a coupon of 2%, conversion premium of 20% to a share price of HK$3.2641 and redemption price of 108.119%.

There is a two-year call with a 120% hurdle and three-year put at 104.702% to yield 3.5%. The greenshoe stands at $7.5 million and fees are an attractive 3%.

Underlying assumptions comprise a bond floor of 95.5%, implied volatility of 17% and theoretical value of 107%. This is based on a credit spread of 275bp over Libor, zero dividend, zero stock borrow and 35% volatility assumption.

Observers say that one of the key reasons why such small and as yet relatively unknown company was able to get public market pricing was because it decided to get a credit rating. Standard & Poor's assigned a BB+ rating and said that while the company's financial ratios are likely to weaken as it embarks on an aggressive expansion plan, they should still remain strong for the ratings category.

But investors lack of familiarity still meant that Panva Gas needed to fairly intensely marketed, with the lead's job made all the more difficult by underlying market conditions and the continuing impact of SARs. There was also said to be a fairly lumpy order book with total participation by 25 accounts, of whom about five placed $4 million to $5 million sized orders. By geography the deal split about a third Asia, third Europe and third offshore US.

"This felt much more like an equity sale than a convertible," says one specialist. "It was one of those situations where if investors liked the company, this structure is a great way to play the China growth story."

Panva Gas recorded net profit of HK$132 million ($16.9 million) for the Financial Year ended December 31 2002, up 318.2% on the year before. Founded in 1998, the company is one of the leading suppliers of LPG (liquefied petroleum gas) in Mainland China and has aspirations to move further into the piped distribution business where margins are a lot higher.