Strong demand for first renminbi CB since July

Hong Kong-listed Fu Ji Food taps the market for at least $175 million as the Hang Seng Index rallies above 29,000 points.
Fu Ji Food and Catering Services last night issued a renminbi-denominated convertible bond that offered a clear reminder of how few CB deals there have been recently, despite the surge in the secondary markets. In Hong Kong, the Hang Seng Index jumped 2% yesterday; surpassing the 29,000 mark for the first time and finishing at yet another record close of 29,133 points.

The Rmb1.32 billion ($175 million) deal was snapped up in about two hours and then proceeded to trade up to about 102%-103%, according to a source. This makes it likely that the greenshoe of Rmb185 million ($25 million) will also be exercised within the next few days. The book was about 10 times covered, which together with the aftermarket performance suggested that the pricing may have been too generous.

Clearly the 30% fixed premium looked very reasonable compared with the two most recent renminbi-denominated deals in July, which featured premiums of 43.5% and 51%, respectively. However, on a technical basis, the price looked reasonable with a 92% bond floor and a 37% implied volatility, compared with a 100-day volatility of 47%. The bonds have a three-year maturity with no put.

ôIt was good timing as the market is really strong, but the lack of paper also contributed to a bit of a squeeze,ö says one observer, adding that it also helped that the company is well-known in the CB market after completing two deals over the past two years. Investors have made money on both of those thanks to a 96% gain in the share price in the past 12 months.

Even though regional equity markets have gained strongly since the end of the August correction - the Hang Seng Index is up 43% since its low on the 17th of that month û this period has seen only five CBs larger than $100 million, which is a marked contrast to the two to three deals a week that were the rule before the summer.

Increased volatility as well as more jittery credit markets could be part of the reason for the lack of issuance. But either way, there is clearly a lot of pent-up demand as demonstrated by the Fu Ji Food transaction.

The source says about 125 investors participated in the deal. Approximately 50 of those were from Asia and 50 from Europe, while the remaining 25 were offshore US accounts.

The zero coupon bonds were offered with a yield range of 2.375% to 3.375% and not surprisingly, given the massive demand, it was fixed at the bottom. While this was the most favourable outcome for the company, supposedly the management wasnÆt too concerned about the yield as it expects the bonds will be converted to equity anyway. There is an issuer call after 1.5 years, subject to a 130% hurdle, to force investors to exchange the bonds for shares if the share price continues to perform. The 30% premium was fixed over yesterdayÆs closing price of HK$25.25, giving a conversion price of HK$32.83.

The bonds are slightly different to the previous renminbi-denominated CBs as they will be settled in Hong Kong dollars as opposed to US dollars, although this is unlikely to have mattered much to investors given that the Hong Kong dollar is pegged within a band to the US dollar anyway.

Sources say Citi, which was the sole bookrunner for the transaction, didnÆt provide any credit bid on the basis of it being a well-known credit story. The company is also known for being conservative in the management of its balance sheet. However, thanks to a recent transaction which has boosted the companyÆs leverage to about five times from one time previously, Fu Ji FoodÆs credit spread has widened from the 350bp that were used to value the previous CB. Most investors were now using a spread of 400bp-500bp over Libor. The earlier mentioned bond floor and implied volatility were calculated based on the mid-point of that range.

Other assumptions included a 5% stock borrow cost and protection for dividend yields above 1.5%

The CB comes after the company last week said it will buy a 60% stake in the buffet-style Golden Hans restaurant chain, which some observers say it intends to turn into a Chinese MacDonaldÆs. According to the term sheet, Fu Ji Food will use HK$800 million ($103 million) of the CB proceeds to cover the acquisition cost for this chain.

The rest of the money will go towards the development of its railway catering business and to general corporate purposes, including capital expenditures, possible acquisitions and investments in joint ventures or strategic alliances.

Prior to the Golden Hans acquisition, Fu Ji Food primarily focused on catering services and business lunch deliveries. Its strategy of expanding the restaurant side of its business, which accounts for just under 20% of total revenues, has been viewed as a positive for its growth outlook. The company also has catering contracts related to the Beijing Olympics in August next year.
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