Shanghai Industrial completes exchangeable

Investment arm of the Shanghai government returns to the equity-linked market for the first time since 1998.

HSBC completed a HK$2.33 billion ($300 million) exchangeable by Shanghai Industrial Investment Treasury into red chip Shanghai Industrial Holdings yesterday (Wednesday).

Similar to Shangri-La Asia's deal last week, Shanghai Industrial used a five-year bullet maturity, but with more aggressive terms. Partly this reflects the performance of Shangri-La's $200 million convertible, which has traded up to 103% bid in the week since launch and partly the existence of plentiful stock borrow, which should make it easier to extract value from Shanghai Industrial's deal.

The transaction was issued in the name of a SPV guaranteed by the unlisted parent and priced at par with a zero coupon to yield 1.75% and redeem at 109.10%. This represented the mid-point of a range encompassing a 1.5% to 2% yield and 107.76% to 110.45% redemption price.

The exchange premium into the Hong Kong listed entity was settled at 29% to the stock's HK$20.45 close, again the mid-point of a 25% to 33% range. There is also a call option after three years subject to a 130% hurdle, redemption in either cash or shares and a HK$389 million ($50 million greenshoe).

ABN AMRO was co-manager.

Underlying assumptions comprise a bond floor of 86.9%, implied volatility of 34% and theoretical value around par. This is based on a credit spread of 115bp over Hibor, 2.2% dividend yield, 125bp borrow cost and volatility assumption around the 35% level.

Observers say that while stock borrow can normally be bought for about 25bp, the market dried up in the hours ahead of launch, prompting a higher assumption. The Hibor spread is based on a credit with an implied cross-over rating of low triple B/high double B. Analysts say the company runs a net cash position.

Books are said to have closed three times covered with a fairly even split between Asian and European accounts. About 20% to 30% of investors asked for asset swap, but most are said to have been happy to take the bonds on an outright basis given the current strength of the Hong Kong equity market.

Both of Shanghai Industrial's previous two exchangeables traded as straight debt for most of their lives and one of them, a $150 million exchangeable due February 2003, has just been redeemed for cash. Prior to this, a $300 million five-year exchangeable issued in 1997 was also redeemed in cash back in 2002 and re-financed through a HK$2 billion syndicated loan.

Re-financing the current deal in the context of a stock price, which has risen 73.37% over the past year, makes a lot of sense. Year-to-date Shanghai Industrial is up 15.21% and while a 29% exchange premium appears high, the deal is of long duration.

Shangri-La's deal of February 9 also had a zero coupon, five-year structure with no put and a redemption price of 114.633% to yield 2.75% at launch or 1.907% currently. Underlying assumptions for this deal were a slightly higher bond floor of 89.8% and similar implied volatility of 33.5% but a volatility assumption of 40%, higher than Shanghai Industrial, which left no room to extract value. Shangri-La also had no stock borrow.

Shanghai Industrial's new deal represents about 8% of share capital. The parent currently holds 60% of the group, which spans a vast range of businesses including retail, infrastructure, cars, IT and tobacco.

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