Hong Kong property developer Sino Land completed a HK$2 billion ($256 million) convertible late Tuesday night raising funds to replenish its land bank. Some form of equity issuance had been expected for a while given the increasingly fevered mindset of Hong Kong property developers and the company's share price performance - up 62% year-to-date. Analysts, therefore, believe the new deal should relieve overhang issues, although the stock is likely to trade down when it re-opens today (Thursday) thanks to short-selling pressures generated by the convertible.
In the run up to launch, a number of Sino Land's house banks had been showing the company indicative terms, but it was JPMorgan - currently the most consistently aggressive CB house in Asia - which got to turn a deal around in a day. However, delays getting regulatory approvals meant the offering ended up being launched late at night, in the process missing most of the Asian accounts and staying suspended all of yesterday.
Terms were aggressive and incorporated an unusual structural twist at the behest of the issuer, which had not been happy about the way its outstanding equity-linked deal was converted a few months ago. With a par-in, par-out structure, the five year deal has a coupon and yield of 1.625%, plus a conversion premium of 33% to the stock's VWAP (volume weighted average price) of HK$6.936.
A VWAP was used rather than the stock's spot close because observers say it had been highly volatile during Tuesday's trading session, rising 5% where other property developers were up only 2.5%.
The deal also features a put option in year three at par and a call option in year three with a 130% hurdle. But the call option deviates from standard practice as it does not give investors a 30 to 60 day notice period to convert or redeem bonds after the deal has been called away by the issuer.
Instead they have three days after the call is triggered.
Observers say this modification was designed at the request of Sino Land, which did not want to face the uncertainty of a long notice period.
"Issuers want to be sure they will get equity on their balance sheet, but a long notice period denies them this," one specialist comments. "The longer the notice period, the more likely it is a stock will trade above and below its trigger price, prompting investors to take different course of action."
"If the share price continues to trade above 130% of the conversion price during the notice period," he explains, "Investors are likely to convert the bonds and realize the in-the-money option before the company redeems the bonds and they only get the principal back. But if the share price goes down, they will wait for redemption.
"A shorter notice period benefits everyone because it removes uncertainty from the market."
Underlying assumptions for the deal comprise a bond floor of 91.30%, implied volatility of 36% and fair value of 101%. This is based on a credit spread of 230bp over Libor, 5% borrow cost, 1.75% dividend yield and 40% volatility assumption.
Terms such as these show how far Sino Land has transformed its fortunes since Merrill Lynch led a HK$1.5 billion deal for it in May 2002. Then the company was considered a low double-B high yield credit. Now observers believe it is an implied low triple-B investment grade credit.
Terms for the 2002 deal comprised a coupon of 3.75%, yield of 4.75%, conversion premium of 18.2% and redemption at 105.57%. Underlying assumptions comprised a bond floor of 93.4%, implied vol of 18% and fair value of 108%. This was based on a credit spread of 275bp over Hibor, 4% borrow, 1.27% dividend yield and 35% vol assumption.
Then Sino Land was trading at a 41% discount to NAV. Now the trading level is more like 20%.
One of the company's main achievements in the interim period has been to de-leverage its balance sheet, although at 6.1 times 2004 earnings, debt to EBITDA is still high. Last year the figure stood at 17 times.
Conversion of its outstanding equity-linked deal and improving cash flow means that total debt dropped from HK$9.9 billion in FY03 (June year end) to HK$6.6 billion in FY04.
The order book for the new deal is said to have closed a healthy three times covered, even though the stock is now trading at a seven-year high. About 50 investors participated of which only about 15% came from Asia.
Observers estimate about $30 million to $50 million of the deal was asset-swapped at launch.
During its first day's trading the deal fell to a bid level of 99.25% although equity markets across Asia were also down.
EPS dilution from the new deal is estimated at 4% for FY05.