New York-listed Vipshop took advantage of the rally in Chinese internet stocks to raise $550 million on Tuesday by selling a convertible bond to investors.
The deal provides the Chinese online fashion retailer with three-year funding at 1.5% and will convert into equity if the stock reaches $201.24, which represents a 40% premium to the current share price.
Shares in Vipshop have been rising steadily since last year, quadrupling in value from $25 in June to $100 in February this year — and then soaring to a high of $176 last week.
This is an extraordinary gain for a company that raised just $73 million through its initial public offering in March 2012, when it sold shares at $6.50.
Momentum is clearly a positive trait to bring into a convertible deal. The company posted its first ever profit during the fourth quarter of last year and hits a sweet spot for China investors by combining two hot sectors — internet and consumer — into one stock.
Vipshop capitalised on this obvious investor interest to upsize its deal from an initial $400 million. The total deal size could reach up to $632.5 million if the company exercises the greenshoe over-allotment option.
That makes it the biggest convertible bond from a non-Japanese Asian issuer this year, though other Chinese internet stocks are expected to follow Vipshop’s lead.
The deal has a five-year maturity with a three-year investor put — a typical structure for Asian deals, but less familiar for US investors who comprised the bulk of the book.
In other respects it was a more conventional US-type deal, with investors able to look at long-dated call options that trade in the US market to value it. Using 50% as the volatility assumption, the deal priced with an implied volatility of 40.3% and was marketed with a credit spread of 550bp to 650bp, resulting in a bond floor of 84%.
Most of those numbers are outside the range of regular Asian convertible deals, where investors do not typically like low bond floors or high volatility assumptions, though the pricing was right in the midpoint of the marketed range.
Asian investors showed interest in the deal regardless of the unfamiliar terms. Indeed, one banking source with knowledge of the transaction said that some of the biggest orders came from Asian accounts.
That was partly due to the timing of the deal, which opened at 7.30am on Tuesday morning, Hong Kong time, giving Asian investors plenty of time to consider the deal before it crossed over to the US.
Plenty of stock borrow was available, according to the source, but at 2% it was far more expensive than the 25bp to 50bp that US investors are used to paying.
The company said that it would use a portion of the proceeds to repay debt, and a 1.5% coupon is clearly an attractive rate given the credit constraints at home in China.
Deutsche Bank and Goldman Sachs were joint bookrunners on the deal.