Ping An sees good response for A-share CB

Existing shareholders take up 56.4% of the $4.2 billion deal and the Chinese insurer receives more than $50 billion of institutional demand for the rest.

Ping An Insurance (Group) received more than Rmb300 billion of demand from institutional investors for its Rmb26 billion ($4.2 billion) A-share convertible bond that was on offer at the end of last week, showing the pent-up demand for high-quality paper.

Ping An’s A-share holders were first in line to subscribe to the CB and took about 56.4% of the deal, according to a banker quoting a Chinese-language announcement filed by the company to the Shanghai Stock Exchange.

Another 0.3% of the transaction went to retail investors who subscribed online, leaving 43.3% or about Rmb11.3 billion for institutional investors. According to the announcement, that portion ended up being close to 30 times covered as 260 investors submitted Rmb329.4 billion ($53.7 billion) worth of orders.

But while impressive, the interest was nowhere near the more than $200 billion of demand that China Minsheng Banking Corp received for its slightly smaller Rmb20 billion CB in March this year.

The largest group of buyers of the Ping An CB was domestic insurance companies, followed by mutual funds and pension funds from large companies. The international demand was very small, which is no surprise since international investors can only invest in domestic CBs through the qualified foreign institutional investor (QFII) quotas, which tend to have limited room to participate in new issues.

Also, with the institutional portion of the deal being almost 30 times covered and a pro-rata allocation, investors were only allocated about 3.3% of what they ordered.

Ping An took advantage of the positive gains in its share price since the Chinese government announced a number of insurance sector-friendly reforms earlier this month and launched the deal just a few days after the CB was approved by the regulators on November 14, almost two years after the company first announced plans for the deal.

When the one-day subscription period opened last Friday the company’s A-share price was up 8.9% since the approval.

This means that even though the conversion price was set at a 1.3% premium to the latest close of Rmb40.78 before the terms were announced on November 20, the premium versus the pre-approval close worked out at 12.5%. The initial conversion price is Rmb41.33.

Ping An’s A-share price has continued to gain in the past week and the conversion price is currently at a slight discount to Thursday’s close of Rmb41.49. Investors cannot convert the CB for the first six months, however.

The CB has a six-year maturity and like other A-share CBs it offers a gradually rising coupon, starting from 0.8% in the first year. The reason for this is that most A-share CBs tend to convert into equity in the first two or three years, so by keeping the coupon payments low in the early years the issuer is able to lower the actual cost of funding. At the same time, the more generous coupons closer to maturity make the deal more attractive to investors.

In the case of Ping An, the coupon will step up to 1.0% in year two and then to 1.2%, 1.8%, 2.2% and 2.6% in the following years. The CB will also redeem at 108% of face value, which translates into an additional yield of 2.4%.

At Rmb26 billion, this is the largest equity-linked deal in Asia-Pacific this year and the second-largest ever behind a $5.9 billion deal by Bank of China in June 2010. It is also the largest CB globally since General Motors raised $5 billion in November 2010.

It could get surpassed in the next few weeks though, if China Petroleum & Chemical Corp (better known as Sinopec) goes ahead with its planned Rmb30 billion CB. The company received regulatory approval for the deal in early July and on Tuesday this week its shareholders voted to extend their approval, which had lapsed in October, for another year, opening the door for a potential deal before year end.

According to sources, Sinopec was reluctant to issue the CB immediately after the approval in the summer as its share price had come down a lot from its 2013 peak of Rmb5.938 in March this year. And until the end of October it was still hovering around the Rmb4.50 mark. Since then it has recoverd slightly and while it is still well below the March level, the stock closed at Rmb4.80 on Thursday —17% above the low point in late June.

However, Sinopec is currently busy dealing with the explosion at one of its crude oil pipelines last Friday, which claimed 48 deaths and injured another 136 people, according to a company announcement on Sunday. So, the CB is not likely to come for another couple of weeks. The company is expected to try to complete it before the regulatory approval expires in early January though.

The Ping An CB broke new ground in China, as the company has received approval from the regulators to treat it as equity on the balance sheet even before the bonds are converted into actual shares. Based on its most recent accounts from June 30, this will improve Ping An's solvency ratio to 181% from 163% before the deal.

As a result, the CB is more than just a funding tool for Ping An, which has recently (at the end of October) also sold Rmb1.8 billion of offshore renminbi bonds to boost its coffers. According to media reports, the five-year dim sum bond was priced with a 4.75% coupon, which shows the savings in funding costs that the company is able to achieve by issuing a convertible bond.

CICC and Credit Suisse Founder Securities were joint sponsors for the Ping An CB. Goldman Sachs Gao Hua has also been involved since shortly after deal was announced, while Gotai Junan and JP Morgan First Capital were added to the syndicate more recently. The five banks were all acting as joint lead underwriters.

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