Shanghai International Port Group has monetised nearly half of its cornerstone investment in Postal Savings Bank of China’s initial public offering through a $1 billion dual-tranche exchangeable bond issue, giving it a sniff of a chance at making a profit.
Unable to exit the 10 month-old investment easily by selling the shares directly due to the low turnover of PSBC's shares and the clunky size of its stake, SIPG opted to sell exchangeable bonds in the aftermarket on Wednesday priced at a 20% premium to the share's closing price.
State-backed SIPG was the second largest cornerstone investor in PSBC’s $7.4 billion floatation in September, investing $2.1 billion in China’s sixth-largest lender at HK$4.76 per share. So on paper it was looking at a 2.1% loss against the share price's close of HK$4.66, and potentially worse given the low liquidity of the stock.
Sources familiar with the situation said it is almost impossible for SIPG to sell $1 billion through a block trade considering that only HK$9 million of its shares have changed hands on average per day over the last three months. And even if SIPG could sell through a block deal, it would have probably made an even bigger loss because of the discount typically needed for direct share sales.
But now SIPG has a chance of making a profit on its investment, assuming the share price reaches the HK$5.592 strike price so the bonds can be exchanged into shares.
The limited volatility of the PSBC share price since the company listed – it has traded between HK$4.11 to HK$5.18 – suggests that may not be easy. But at least the exchangeable bond allows the company to free up part of the bulky investment at a low cost – the exchangeable bond’s yield-to-maturity of 75 basis points is much lower than China’s 3-year bond yield at 352bp as of Wednesday close.
SIPG, rated A1 by Moody’s and A+ by Standard & Poor’s, launched the exchangeable bond in two tranches of $500 million each. The bond was issued through an investment vehicle named Shanghai Port Group (BVI), with SIPG providing credit support through a keepwell and liquidity support deed.
The bond was rated A2 by Moody’s and A by Standard & Poor’s, both one notch lower than SIPG.
A shorter-dated four year, two put bond was pitched at a yield-to-maturity of 0.25% to 0.75%, while the longer-dated five-year, three put bond was being guided at 0.5% to 1%. Both tranches were pitched at a 15% to 25% conversion premium, and dividend protection is provided for any annual payout above 15 Hong Kong cents.
Based on the price guidance, SIPG is prepared to offer 25bp for investors that are willing to hold the bond for an extra year. But in the end both tranches were priced at 0.75% yield – being the mid-point for the five-year tranche and the best-end for investors for the three-year tranche.
Sources said the identical yields were the result of strong outright demand for the deal, allowing the bookrunner to push for tighter pricing for the longer-dated tranche. European outright investors, most of which were wall-crossed before the deal was launched, subscribed for a significant part of the deal.
One of the reasons for the strong outright participation was the fact that they could hardly build a meaningful position of the stock because of its low liquidity. The exchangeable bond’s relatively high bond floor at the final price – around 95.5% for four-year and 94.5% for the five-year tranche – also provided comfort for long-only investors.
At final pricing, the implied volatility for the four-year tranche was around 23% based on underlying assumptions of a 85bp credit spread and 2% borrow cost. For the five-year tranche, the implied volatility was around 22% assuming a 90bp credit spread.
Deutsche Bank was the sole bookrunner of the exchangeable bond issue.