Shangri-La brings five-year CB with zero coupon

The Hong Kong-based hotel operator raises $500 million with support from a few anchor orders, but aggressive terms send the CB lower in the grey market.
The rooms at Shangri-La's World Summit Wing hotel in the 330-metre tall China World Tower offer spectacular views of Beijing
The rooms at Shangri-La's World Summit Wing hotel in the 330-metre tall China World Tower offer spectacular views of Beijing

Shangri-La Asia, the Hong Kong-based hotel group owned by Malaysia’s Kuok family, yesterday raised $500 million from a convertible bond that it will use to repay bank loans maturing this year and for capital expenditure. Like the $500 million CB issued by Agile Property Holdings on Wednesday, the deal looked aggressive, but while the Agile offering was well received by investors, they approached Shangri-La with a lot more caution.

Specifically, the combination of a five-year maturity with no put and a zero coupon looked punchy, as did the 35% conversion premium. However, what primarily spooked investors and caused the bonds to dip below par in the grey market shortly after launch, appears to have been some confusion over the availability of asset swaps. And, as is often the case on competitive mandates, there was a lot of chatter about the deal in the market, adding to the confusion.

The bookrunners told investors that there were some asset swaps available, but it was initially unclear how much. Some reports indicated as much as $200 million worth, while the actual amount turned out to be approximately 10% of the deal. Meanwhile, some market participants questioned the 200bp credit spread that the CB was being marketed at, arguing that it ought to be wider — especially if there weren’t enough asset swaps to go around.

Asset swaps are a rarity for CBs out of Hong Kong and would have made the deal more attractive for hedge funds in particular. However, there is also readily available stock borrow in the name that would have made it less urgent for investors to hedge the credit.

In addition, a source said the deal was supported by a small number of big anchor orders from long-only accounts that didn’t need asset swaps, hence making more available for those who did. Meanwhile, Shangri-La is viewed as a high-quality, blue-chip name that could be expected to attract a decent amount of interest from outright investors, although the steep conversion premium may have put some of them off.

The zero-coupon CB, which also has no call, was offered with a yield to maturity between 1.75% and 2.25%, and a conversion premium ranging from 35% to 42% over the latest market price of HK$21.50. Both were fixed at the investor-friendly end, which was no great surprise given that the bonds were offered at about 99.5 in the grey market.

The CB also came with a $100 million upsize option that wasn’t exercised.

However, the bonds were issued at par and the source said they had been allocated in full. It was unclear as of early this morning whether that meant they went to external accounts or whether joint bookrunners HSBC and BOC International had absorbed part of the deal on their own books.

About 50 investors participated in the deal and, despite the long-only anchor orders, the majority of the demand came from hedge funds. European investors played a bigger role than in the Agile deal the night before, which may be due to the fact that they are more familiar with the name. After all, Shangri-La owns or operates about 70 hotels and resorts around the world.

The 35% conversion premium is the second highest for an Asian CB this year after the 40% achieved by Agile on Wednesday. It translates into a conversion price of HK$29.03, which compares with the company’s all-time high of HK$27.30 that it reached as far back as October 2007. The stock was on an upward trend in the final seven months of last year when it gained more than 60%, but started to head lower from the beginning of this year after hitting a high just above HK$22. The downward pressure came as the company sold new shares as part of a $605 million 1-for-12 rights issue.

The share price has resumed the upward trend in the past month and, after the publication of its 2010 earnings on March 30, the stock jumped 8.5% during the course of two days. Again though, the share price seems to be running into resistance around HK$22.

Despite its blue-chip status, Shangri-La is not that widely researched, but all nine analysts that follow the stock have a “buy” on it. Still, their average target price is HK$24.92, which is about 14% below the conversion price.

At a credit spread of 200bp, a stock borrow cost of 45bp to 75bp and a full dividend pass-through, the final terms translated into a bond floor of about 90% and an implied volatility of 24%. The latter compares with a historic vol of 31%-32%, and hence looks quite attractive.

Some investors questioned the 200bp credit spread due to the fact that Shangri-La’s sister company Kerry Properties, which is also part of the Kuok group, issued a 10-year bond last Thursday at a yield spread over Treasuries of 250bp. The two companies aren’t exactly in the same line of business, but they are close enough and in fact Kerry and Shangri-La do own a few joint developments in China.

While the spreads aren’t directly comparable as CBs are priced over Libor, they do both indicate a premium over the respective risk-free rate and one CB specialist noted that with Shangri-La being unrated and having no outstanding dollar bonds, it is a bit difficult to justify a tighter spread than for Kerry, which is rated BBB- (S&P) and is also a more frequent issuer. Notably, the Kerry bonds also widened by more than 10bp on Friday in an otherwise positive market, as investors viewed the pricing as being too tight.

In addition to the rights issue and the CB, Shangri-La obtained a five-year bilateral unsecured HK$2.5 billion ($323 million) loan in January and is currently in the process of setting up a new five-year term-loan facility of $120 million, which it expects to complete before the end of April. The money from these fundraising exercises will be used primarily to repay its outstanding bank borrowings as the company has about $1 billion of loans coming due this year.

In its earnings announcement last week, Shangri-La said it is also negotiating additional long-term loan facilities with certain banks to refinance the remaining loans maturing in 2011 and to meet scheduled project funding requirements. “The group has received a favourable response from the banks [and] does not expect any problems to meet the repayment obligations of bank borrowings maturing in 2011,” it said.

Shangri-La was suspended from trading during the afternoon session yesterday, but the CB still wasn’t launched until about 4.30pm. The books were kept open until about 10pm Hong Kong time. HSBC was the sole global coordinator, while BOCI was a joint bookrunner.

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