Strong start to the year for Asian equity-linked market

Haitian raises $200 million from debut CB, while CP Foods brings Thailand’s first ever exchangeable bond, a $290 million deal into CP All.

Thursday turned out to be a busy night in the Asian equity-linked markets with Hong Kong-listed Haitian International Holdings raising $200 million from its first-ever convertible bond and Thailand’s Charoen Pokphand Foods (CP Foods) selling $290.4 million of bonds exchangeable into shares in convenience store operator CP All.

Haitian designs and manufactures plastic injection moulding machines that are used in a variety of industries ranging from automotive and construction materials to healthcare and consumer products to make plastic products and parts. There was also a Y20 billion ($191 million) CB in Japan arranged by Daiwa on behalf of materials and electronics manufacturer Taiyo Yuden.

Add to that the exchangeable bond of up to $850 million into China Overseas Land & Investment that is due to price after the market closes on Friday and there could be more than $1.5 billion of equity-linked issuance in the region in the first full week of the year – the busiest start to a new year in a long time.

By comparison, there have been no equity-linked deals in the US so far this year, while Europe has seen just one $200 million deal, according to one banker.

The deals indicate that the potential for lower coupons in the equity-linked market is gaining traction among issuers as interest rates and straight bond yields are rising. CB specialists have been predicting a shift towards equity-linked issuance for the past few months after 18 months of heavy activity in the straight bond market.

At the same time, investors are keen to buy after a shortage of new equity-linked supply in Asia ex-Japan in the past two years. Last year saw just over $10 billion of new issuance outside of China’s A-share market, and in 2012 the amount of new deals amounted to only $7.3 billion. That isn’t much considering that redemptions and conversions of existing deals is reducing the outstanding amount of paper as well.

Indeed, the two deals on Thursday night saw pretty good demand although sources said there was quite a lot of price sensitivity for the Haitian CB, while the CP All deal was priced quite generously to offset the current protests in Thailand.

The latter was the first exchangeable bond ever by a Bangkok-listed company and the first equity-linked deal out of Thailand since BTS Group sold $327 million of baht-denominated CBs in January 2011, according to FinanceAsia records.

Haitian CB
The $200 million Haitian deal was the first to hit the market, at about 5:30pm Hong Kong time. The deal had a straight-forward structure with a five-year maturity, a three-year put and a three-year issuer call subject to a 130% hurdle. There is also sufficient stock borrow in the market to allow the buyers to hedge the equity option, making it an attractive deal for hedge funds.

The terms were on the aggressive side, however, particularly considering that the share price has doubled since the beginning of 2013.

The bonds were offered with a coupon and yield of 1%-2% and a conversion premium of between 30% and 40% over Thursday’s closing price of HK$18.98. The top end of the premium range was particularly ambitious for a debut issuer since the highest conversion premium on a CB out of Asia ex-Japan last year was just 35%.

The earlier mentioned exchangeable into China Overseas Land & Investment, which launched on Tuesday evening and closes at 10am London time on Friday (January 10), does come with an exchange premium between 50% and 60% though.

The terms were fixed at the best end for the investors, resulting in a 2% coupon and yield and a 30% premium. The $50 million upsize option wasn’t exercised, although that was said to be due to the company not being sure it wanted the extra money, rather than a lack of demand.

Indeed, sources said the base deal was more than three times covered when the order books closed after about two-and-a-half hours. One source said the issuer has 30 days to exercise the upsize option should it decide that it has use for the additional capital. Haitian didn’t specify what it will use the proceeds for, saying only that they will go towards general corporate purposes.

The demand was fairly evenly split between hedge funds and outright investors, and more than 70 accounts participated in the transaction. This is a pretty high number for a $200 deal and does suggest that investors are ready to put money to work.

One source said the two bookrunners had done some wall-crossing before launch, and would have been pretty comfortable that it would get a good reception. Long-only investors like the company because it is one of the market leaders in its part of the industry, both in China and globally. Its strong position when it comes to moulding machines used in the auto industry also makes it a play on the rebound in the economy.

The CB was marketed with a credit spread of 450bp over Libor, full dividend protection and an assumed stock borrow cost of 1%. At the final terms, and assuming a 5% drop in the share price in the aftermarket, this resulted in a bond floor of 90% and an implied volatility of 26%. The latter compares with an historic volatility of 33%-35%.

The CB was quoted at par, or slightly above, in the grey market during the bookbuilding.

The deal was arranged by JP Morgan and UBS.

CP Foods EB
Coming at a time of increased street protests and just ahead of an election, the timing of the first equity-linked deal out of Thailand in two years was a bit surprising but, as noted, the deal was priced to sell.

The joint bookrunners – Bank of America Merrill Lynch and its Thai joint venture partner Phatra Securities – had also done a lot of work before launch and the deal was said to be largely covered when the order books opened at about 7pm Hong Kong time on Thursday.

They had also ensured there would be good interest from hedge funds by creating a stock lending facility comprising up to 110 million non-voting depositary receipts (NVDRs) that are using the same shares that are underlying the exchangeable bonds.

According to a source, there are shares available to borrow in the market but, since CP All does have a foreign ownership limit, there is a risk that bondholders who short the stock could be faced with a situation where the “foreign” shares trade at a premium when they need to buy the stock back. Making NVDRs available as well should remove that risk, the source said.

Investors that want to make use of the stock lending facility will need to put the exchangeable bonds (EBs) on swap with BoA Merrill, the term sheet shows.

The CP Group, which is controlled by Thai business tycoon Dhanin Chearavanont, has been very active with regard to acquisitions in the past year and has been raising capital both from a variety of deals in the equity and debt markets (both public and private), so the fact that it is choosing to tap the equity-linked market as well should come as no great surprise, however.

The EB is issued by a special purpose vehicle that is wholly-owned by CP Foods and convertible into CP All, which owns and operates the 7-Eleven franchise in Thailand. The majority of the net proceeds will be used to repay outstanding debt and the remainder will go towards general corporate purposes, the term sheet shows.

The bonds have a five-year maturity and a two-year put. They were offered with a 0.5% coupon, a 2.5% to 3% yield-to-put and an exchange premium of 30%-35%.

The yield was fixed at the mid-point, at 2.75%, while the premium was kept at 30% over Thursday’s closing price of Bt41.

The EB was based on 180 million of underlying CP All shares, which meant that the deal size at launch ranged from $290.4 million to 301.6 million. As the initial exchange price was fixed at the bottom of the range at $53.30 per share, the final size ended up at $290.4 million.

The bonds were marketed with a credit spread of 350bp to 400bp, a 1% stock borrow cost and protection for the EB holders if the dividend yield exceeds 2.5%. At a 350bp spread, the final terms resulted in a bond floor of 97.6% an implied volatility of about 22% and a fair value of about 105.7%, according to one source. For investors choosing to use a 400bp spread, the bonds would be even cheaper.

The valuations assume a stock slippage of just 3% as CP All is a highly liquid stock that is expected to be able to absorb the EB-related selling without too much impact on the share price.

When the deal closed at about 10:30pm Hong Kong time, it was said to be significantly oversubscribed. Like Haitian, it saw a fairly even mix of hedge funds and outright accounts, but the source said the allocation was skewed towards outright investors. About 35 accounts came into the deal, meaning the investor participation was not as wide as for the Chinese deal.

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