Soufun Holding, the US-listed Chinese operator of a real estate internet portal, was able to upsize its convertible bond issue last week by $100 million to a total of $350 million, suggesting a continued strong demand for Chinese internet companies despite a recent pull-back in certain names.
The deal, which was completed early on Thursday morning Asia time after a near 24-hour marketing period, is the fourth CB from a major Chinese internet company listed in the US in the past few months. The other three – Qihoo 360, Ctrip and Sina – have raised a combined $2.2 billion of fresh capital from the CB market since late August.
Soufun, which provides various value-added services including marketing, e-commerce and property listings, launched its CB at the end of US trading last Tuesday, taking advantage of a 17.8% jump in its share price on Monday and Tuesday that pushed the stock to a new record high of $76.54.
The share price has risen 66% since its largest shareholder, private equity firm General Atlantic, sold $124 million worth of ADRs at a price of $46 each in mid-September and has tripled since mid-July.
Last week’s gains came after the company said it will start to offer third-party financial products and services to its real estate portal users from December 16, leveraging its large client base of 15 million registered home buying members, more than 500,000 certified agents and more than 10,000 developers and home improvement companies.
The share price fell 3.6% on Wednesday while the CB was being marketed but this is considered minor when investors are faced with potential dilution from the issue of new shares or CBs. The stock reached a low of $71.80 during the session, but recovered after the lead banks chose to close the order books for the CB a couple of hours earlier than planned, at around 2pm, citing strong demand.
It eventually closed at $73.76, which was used as the reference price for the CB.
A second reason for wrapping up early, according to a source, was that the bookrunners wanted to avoid having a number of hedge funds come in and inflate the order book at the last minute once it was clear that the deal was going well. The issuer preferred to prioritise outright accounts and hedge funds that came in early because they like the fundamentals of the company and because they saw value in the CB, he said.
Like the other three Chinese deals before it, Soufun’s CB has a five-year maturity and comes with a three-year investor put option. It has no issuer call, however. It was offered with a coupon and yield between 1.75% and 2.25% and a conversion premium of 35% to 40%.
There was no upsize option at launch so the enlarged deal size was a clear indication of the level of interest. The issuer also kept the $50 million greenshoe, which means the CB could increase further to $400 million depending on the aftermarket trading.
The premium was fixed at the issuer friendly end, at 40%, which resulted in an initial conversion price of $103.26.
Having upsized the deal by 40%, the coupon was fixed at the mid-point. But even at 2%, the coupon was tighter than the 2.5% that Qihoo achieved at the end of August, despite the fact that Soufun is viewed as a weaker credit and is only about half the size in terms of market cap. Both companies fixed their premium at 40%.
The bonds were marketed at a credit spread of about 500bp to 550bp over Libor, while the stock borrow cost was assumed at 1%. They also come with a full dividend pass-through.
Using the wide end of the credit spread, the bond floor worked out at about 89% and the implied volatility at 30%. The stock has a long-term historic volatility of between 60% and 80%, depending on which period one uses.
The demand out of Asia was strong enough to cover the entire deal, but the order flow picked up pace once the marketing moved to the US at the start of New York trading on Wednesday and the allocations were skewed towards US accounts. In all, Soufun received about $1.5 billion worth of orders from more than 100 investors.
The majority of the demand came from CB-focused hedge funds, which was no real surprise since Soufun is a liquid and highly volatile stock with plenty of stock borrow available. But one source said there were also some very significant outright orders.
One reason for the interest, sources said, is the company’s market position as the leading real estate portal in China, another that the stock is relatively cheap versus other US-listed Chinese internet companies.
In the third quarter, Soufun booked a 45.5% increase in revenues to $185 million, while net income doubled to $102.7 million under US GAAP, due to a combination of revenue growth and cost control. According to the company’s chairman, Vincent Mo, this was the 13th consecutive quarter of earnings growth and of beating guidance since the company went public in September 2010.
Soufun also raised its revenue guidance for 2013 from between $538.0 million and $548.0 million to between $605.0 million and $615.0 million, representing a year-on-year increase of up to 42.9%.
On top of that, Soufun’s move to offer financial products and services to its customers has attracted quite a lot of buzz in the market. In a release issued last Monday, Mo said that Soufun is increasingly being approached by its portal users for dedicated financial products such as mortgages, home insurance, escrow equivalent services, bridge loans, consumption loans and home equity loans.
Property-related financial needs are huge and in the early stage of development in China, he said, adding that Soufun’s financial services platform will play an important role in the next three to five years in creating a full-service eco-system for home buyers and sellers. The aim is to make sure they stick to using Soufun for their long-term needs, he said.
Initially, the company will work with qualified financial institutions to launch joint financial products catering specifically to Soufun’s members and clients. In the longer run, once Chinese regulations allow it to do so, the company will develop its own financial products, it said.
Soufun didn't specifiy the use of proceeds from the CB, but said it will go towards general corporate purposes, including working capital, capital expenditures, business expansion and potential acquisitions.
Soufun’s share price fell 1.5% on Thursday after the pricing of the CB and another 1.4% on Friday, while the CB saw active trading around par, according to a source.
Citi and JP Morgan were joint lead bookrunners for the transaction, while Credit Suisse was a junior bookrunner.
