RexLot courts outright buyers with $245m CB

Hot on the heels of China LotSynergy, RexLot taps the convertible market with its third CB since 2011.

RexLot became the third Hong Kong-listed company this week to price a convertible deal when it closed a HK$1.9 billion ($245 million) bond late Wednesday, as issuers rush to the market while share prices remain high.

It was also the second Chinese lottery company in as many days, though it was a coincidence that the deal came so soon after China LotSynergy’s $75 million bond, according to one source familiar with RexLot’s plans. (It is also the third company in the past week with a kingly name, after Kingsoft and Kingdee.)

The rush of issuance has coincided with the end of the earnings quiet period. Four issuers have now raised more than $600 million since March 31 — and more than $2.5 billion so far this year.

RexLot has been planning an issue for some weeks and recently returned from a non-deal roadshow where management met with outright investors in Europe, where there is demand for exposure to high-growth companies.

Investors are still somewhat price-sensitive and the roadshow was an important element of RexLot’s success, as the company provided no stock-borrow, limiting the interest from hedge funds.

Several outright investors provided anchor orders before the deal launched at 5pm on Wednesday and that allowed managers Daiwa and Bank of America Merrill Lynch to market a wide but aggressive range, including a conversion premium of 32% to 42% and a coupon of 3.5% to 4.5%.

That reflected a stronger book than was available to LotSynergy, which had gone out with a much smaller premium of 20% to 30% and priced at the lower end of that range with a big discount to actual volatility, despite a $20 million stock-borrow facility.

RexLot’s focus on genuine investors served it well. The top 10 accounts were all outrights and in total more than 80% of the deal went to non-hedge fund buyers — while some hedge fund investors were even willing to take a long position in the deal.

Several sources familiar with the deal said it was “multiple times” subscribed, without providing further details.

The deal had a standard structure with a five-year maturity and a three-year investor put option. It launched with a base deal of about $155 million (in Hong Kong dollars) plus an upsize option of $50 million, which was immediately exercised due to the demand.

Although the level of demand could have allowed tighter pricing, according to one source familiar with the deal, RexLot chose to emphasise the quality of the order book and priced at the investor-friendly end of the range, with a 34% conversion premium that produced a target price of HK$1.407 and a 4.5% coupon.

There was some stock borrow available in the market at an assumed 5% cost. Investors used a credit spread of around 600bp and with an implied volatility of 29% this gave a bond floor of 92.6%. Fair value was 102 and the bond was said by banking sources to be trading up slightly in Thursday trade.

Victor Chan, an executive director of the company, who owns 13.7% of its stock, will also receive a separate tranche of roughly $40 million, subject to shareholder approval and a 90-day lock-up. Chan’s bonds will be issued to Kingly Profits, a British Virgin Islands company that he indirectly controls.

RexLot said that it will use the proceeds to finance expansion through organic growth and potential joint ventures and acquisition opportunities, as well as for general corporate and working capital needs.

The Japanese lender Daiwa, one of the lead managers on the deal, has a strong relationship with RexLot and managed both of its previous deals: a 2011 CB that is now well in the money and a 2012 tap of that deal.

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