Shenzhou International, a leading Chinese garment exporter, has raised $503 million through a convertible bond issue to help it fund the construction of more factories in Southeast Asia as it seeks to escape rising costs at home.
The Hong Kong-listed company makes clothing for international brands such as Uniqlo, Adidas, Nike and Puma from its production base in Ningbo, to the south of Shanghai, but rising wages and high domestic cotton prices have made it more expensive to manufacture in China.
A stronger renminbi currency has also reduced export demand (the currency appreciated by 26.4% against the yen during 2013).
Shenzhou’s convertible bond, which is its first, allowed the company to raise capital at a fixed cost of 0.5% a year and a yield of 1.25%. The securities, which have a five-year maturity and three-year investor put option, will convert to equity at a premium of 36.5% over the stock’s closing price on Wednesday.
“The CB is the weapon of choice for debut issuers in this market,” said a convertible bonds specialist in Hong Kong. “The time is right both from a technical and investor standpoint — investors are looking for equity exposure and it makes sense for them to get some downside protection, while issuers want to lock in cheap funding before [interest] rates rise.”
The money will come in handy as Shenzhou’s overseas expansion in Southeast Asia has faced some problems. The company had to evacuate its factory in Phnom Penh in January after the police shot and killed several protesters nearby who were demonstrating in favour of a minimum wage. The factory, which is responsible for 10% of the company’s production, re-opened within a few days but the incident highlighted the risks involved in manufacturing in low-cost countries.
Its other new overseas base is next door to Cambodia in Vietnam, where Chinese facilities have recently come under attack from protesters angered by China’s aggressive naval tactics in waters disputed by the two countries.
Despite the rising costs and challenges of expansion, the company still managed to increase sales by 12% during 2013 to reach a record figure of Rmb10 billion ($1.62 billion) — and investors were so keen to buy the company’s convertible bond that they placed more than $500 million of orders in the first five minutes after the books opened at 5.30pm Hong Kong time on Wednesday.
Joint bookrunners Credit Suisse and HSBC capped the size of orders that investors could place after half an hour to control the process.
Shenzhou is a liquid stock with plenty of borrow available at a general cost of 50bp, so hedge funds were all over the deal due to the lack of supply from Asian names. However, the issuer was keen to attract outright investors to the book. The convertible bond banker said Shenzhou could have issued a zero-coupon deal but chose to offer some carry to make the deal more attractive for long-term holders.
The bookrunners marketed the deal with a conversion premium of 32.5% to 37.5%, resulting in a conversion range of HK$37.43 to HK$38.84. The coupon was fixed but the yield on offer ranged from 1.25% to 1.75%.
The strong demand allowed Shenzhou to price towards the issuer-friendly end of that range and still allocate roughly 50% of the book to long-only investors.
Shenzhou’s credit spread was assumed at 300bp and with the implied volatility at 32% this produced a bond floor of 92%. The convertible bond banker said the bond was trading up at around 101.5 on Thursday. The stock had slipped 6% by Thursday afternoon as hedges kicked in — and was roughly in line with the assumed 5% slippage.
It is the company’s first convertible bond but not its first foray into capital markets, having funded the first phase of its expansion in Vietnam through a $200 million top-up placement of shares in June last year.