Sino-Forest's $300 million CB attracts good demand

The Toronto-listed forestry plantation company prices at the mid-point of terms despite competition from a second CB by an Asian issuer in the market at the same time.
After almost three weeks of no convertible bond activity by Asian issuers, investors got two deals to choose from last week, worth a combined $420 million. Both issuers are listed outside of Asia, however û in New York and Toronto û and the majority of the bonds were bought by US investors.

The offering by Sino-Forest Corp, a Toronto-listed company that owns and manages forestry plantations in China and produces timber and engineered wood products, was the larger of the two at $300 million. It was also the more popular with investors and priced at the mid-point of the offered terms, making it one of the few CBs from Asia in recent months to fix the premium above the bottom of the indicated range.

Trina Solar, an integrated solar power company involved in the production of ingots and wafers as well as solar cells and modules, was in less demand and priced at best terms for investors, which sources say was partly due to the flurry of outstanding CBs in the solar power sector. The stock is also highly volatile and a concurrent offering of American depositary receipts sold to facilitate hedging of the CB had to be priced at a deep discount. The company raised $120 million with the help of ABN AMRO, Credit Suisse and Deutsche Bank (see separate story).

Sino-ForestÆs CB was arranged by Merrill Lynch with Credit Suisse as a co-manager. The deal includes a $45 million overallotment option, which wasnÆt immediately exercised but could bring the total proceeds to $345 million. The bonds have a five-year maturity, with no put or call options. They were offered with a conversion premium between 32.5% and 37.5% and an annual coupon between 4.75% and 5.25%. Following a two-day marketing period, the deal was priced after the US close on Thursday with a premium of 35% over the C$15.05 close and a 5% coupon. This gives an initial conversion price of C$20.32 ($20.29), which is well below the companyÆs 12-month high of C$25.12. Because the bonds are both sold and redeemed at par, the coupon is also equal to the yield.

According to a source, the deal was well covered and attracted about 30 investors. The final book contained a mixture of fundamental demand and blue-chip CB investors. It also wasnÆt very price sensitive.

Like most other companies this year, Sino-Forest has been under pressure and, at the time of pricing, the share price was down 40% from its October high. The stock held up well during the marketing of the CB, however, falling only 2.3% over the two-day period, and the source says investors like the companyÆs track record and management. In the first quarter this year, its net profit increased 26% to $14.5 million as its sales of wood for pulp production increased.

The company also had a clear plan for the use of proceeds, saying it will use $230 million to acquire commercial plantation forests in ChinaÆs Fujian province, which it intends to vertically integrate with its downstream wood processing facilities.

In a statement issued by the company to announce the CB issue, it said it has entered into a non-binding memorandum of understanding for the acquisition, which includes 200,000 hectares of Chinese fir, pine and eucalyptus trees at a maximum price of Rmb350 ($51) per cubic metre. Another $15 million will be spent on leasing land and planting Jatropha trees on it. Jatropha trees produce a fruit which can be used to make biodiesel. The balance of the processed will be used as general working capital.

The bonds were offered with a credit spread assumption of 600bp-650bp above Libor, which was based on the fact that Sino-Forest has an outstanding high-yield bond that matures in 2011, which as of Thursday last week traded at a spread of 500bp. There are also five-year credit default swaps available on this name, which on the same day were quoted at 460bp/510bp. Observers say the 100bp or so wider spread over the outstanding bonds is reasonable when taking into account the longer maturity and the new issue premium. The company is also getting a pretty good deal with a 5% coupon on the CB, compared with a 9.125% coupon on its high-yield bonds.

MoodyÆs Investors Service has given the CB a provisional rating on par with the high-yield bond at Ba2, which it says reflects the companyÆs strong balance sheet, including a pro forma total debt-to-Ebitda ratio of 1.6 times and a total debt-to-capitalisation ratio of 40%. This ôprovides a sufficient buffer for the additional debtö, says Ken Chan, a senior analyst at Moody's. "At the same time, it reflects Sino-Forest's aggressive growth strategy, which needs to be supported with heavy capex; as such, the company is projected to continue generating negative free cash flow over the next few years," he adds.

Other assumptions for the CB include a full dividend pass-through and a 1% stock borrow cost. The latter is a reflection of the fact that there is plenty of borrow available in this name. The stock is also quite liquid with $25 million worth of turnover every day.

This gave a bond floor of 80% and an implied volatility of about 28%.

The share price held up well following the deal, dropping only 1.7% to $14.80, although it did buck a more positive trend in the broader market where the Dow Jones Index ended 0.4% higher after another volatile session, bringing its total gains for the week to 3.6%.
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