The mid-sized Shanghai-based developer could probably have hoped for a better day for its first return to the capital markets since its initial public offering in October. Not only did the Hong Kong stock market drop 2.3% as part of an Asia-wide sell-off sparked by concerns of another round of tightenings in China, but the companyÆs $150 million convertible had to compete with no fewer than five other CBs across the Asia-Pacific markets.
It is a clear testament to the current strength of the convertible market û and the investor appetite for new paper û that all of these deals did well. There were signs of increasing price sensitivity, but whether that was due to the set-back in the secondary market, an emerging fatigue with new issues or to the fact that the terms on these bonds were quite aggressive to start with, is hard to tell at this stage, bankers say.
Including todayÆs four CBs in Asia ex-Japan (the other two came out of Australia), the total amount of new equity-linked paper since this current issuance wave started on April 10 has now reached $4.1 billion.
Mainland property developer SPG Land launched its offer around the time of the Hong Kong market opening after seeking a suspension of the stock, giving it a slight advantage over some of the other deals that werenÆt launched until after the markets closed.
On the other hand, the fact that SPG Land ômissedö the market downturn yesterday which weighed heavily on property stocks, suggests its share price is almost poised to fall today when the stock resumes trading. This could put some strain on the CB too, although a certain degree of stock slippage was built into the valuation models.
One source close to the offer said the decision to go ahead yesterday was made to capture the strong sentiment that has surrounded the property sector in recent weeks, which is believed to have been at least partly fuelled by Country GardenÆs $1.7 billion IPO. And with the latter due to start trading today, there was a question of how long that positive sentiment would last.
DBS Asia Capital, which also arranged SPG LandÆs IPO, and Morgan Stanley were joint bookrunner for the CB offering.
SPG offered Rmb1.158 billion ($150 million) worth of bonds that are convertible into its Hong Kong-listed shares at a premium of 35.5% over WednesdayÆs closing price of HK$5.99. The bonds were initially offered to investors with a premium between 33% and 38%. There is also a greenshoe of an additional Rmb232 million, which could lift the total deal size to Rmb1.39 billion ($180 million). If exercised, the size of the CB would be identical to the $181 million SPG Land raised from its IPO.
Like Hopson Development Holdings and solar cell wafer manufacturer ReneSola earlier this year, SPG Land chose to sell renminbi-denominated bonds to get around a new rule that requires a company to mark-to-market the equity option part of convertibles that are issued in a different currency than the companyÆs functional currency. In this context, the functional currency tends to be interpreted as the one in which the company generates the majority of its revenues and has most of its business risk.
A mark-to-market treatment of a CB could potentially make the companyÆs earnings more volatile. By denominating the bonds in the Chinese currency SPG Land was also able to get away with a lower yield that it would have had it issued in dollars since the renminbi yield curve is lower than its dollar equivalent.
This could potentially have led to investors asking for compensation through the other bond terms, but one source said this wasnÆt the case û perhaps because further appreciation in the Chinese currency is seen as almost a given. The latter also means that even dollar-based investors donÆt worry too much about the foreign exchange risks associated with the bonds being denominated in a currency other than the dollar.
The yield was marketed to investors in a range of 2% to 2.5% and like the conversion premium it was fixed in the middle of that range. According to the source, there was sufficient demand to have priced the deal at the aggressive end, although that would have meant losing a few key investors who the company was able to include with a mid-point pricing.
At the final price, the deal was said to have been ôcomfortably coveredö with about 70 investors in the book. The demand was pretty evenly split between Asia and Europe.
The underlying assumptions included a credit spread of 375 basis points, a full dividend pass-through and a 5% stock borrow cost, which gave a bond floor of 94.5% and an implied volatility of 28.7%. The bookrunners provided no asset swaps, since most investor were believed to be buying the bonds on an outright basis to benefit from the equity story. Consequently there was no concern either about the gap between the implied volatility and the 100-day volatility of more than 56%.
The share price is off from a record high of HK$7.11 that was reached in December, but has rallied 43% since early March to yesterdayÆs close of HK$5.99. It is currently trading 25% above its IPO price of HK$4.78.
Given that SPG Land is still quite a small company with a market capitalisation of only $800 million and little research coverage, the bookrunners arranged for two conference calls between the management and investors in Asia and Europe to help attract interest to the deal. The management used the time to explain its recently released earnings in more detail and to outline its acquisition strategy. It didnÆt go into details about specific projects, however. In connection with the earnings release, SPG Land said its land bank has reached 2 million square metres as a result of it acquiring 832,000 sqm since the IPO.
However, it still has Rmb819 million of its IPO proceeds left and with close to Rmb1.1 billion raised from the CB, the company now has approximately Rmb1.9 billion available for more land acquisitions.
SPG Land focuses primarily on residential properties for the mid-to upper class segment of the market. Its existing projects include a large portion of villas and town houses.
Having struggled with a negative cash flow and net current liabilities in recent years, SPG Land has also diversified into hotel operations with the aim of generating long-term recurrent income. This includes a 50-50 joint venture with Hong Kong & Shanghai Hotels to build The Peninsula Shanghai, which is expected to open in 2009.
The other deals in the market yesterday were a $456 million two-tranche Singapore dollar-denominated offer from Guocoland, a $250 million offer from IndiaÆs Sterling Biotech and a privately-placed $110 million convertible from Hotel Leelaventure, also from India, that was completed before the market opened. In Australia, Macquarie Communications Infrastructure sold A$625 million ($523 million) worth of exchangeable bonds alongside an equity tranche of the same size, and ING Industrial Fund raised A$400 million from the issuance of new CBs.