Structured exchangeable meets with approval

The chairman of Singapore-listed steel maker Delong raises $121 million by selling bonds that can be exchanged for Delong stock.
While credit markets remain jittery, the chairman of Chinese steel manufacturer Delong Holdings on Friday raised at least S$175 million ($121 million) from the sale of bonds that are exchangeable into Delong stock. The deal has a greenshoe that could increase the size to as much as S$220 million ($153 million).

The five-year, zero-coupon bonds were sold by a company called Best Decade Holdings, which holds the chairmanÆs 77% stake in the Singapore-listed steel maker but has no other assets. To give investors adequate downward protection, the deal included a fair bit of structuring that was put in place by Citi as the sole bookrunner. This included over-collateralising the value of the bond issue û both in terms of pledged shares to cover the bond issue three times over and the withholding of dividends û and by limiting the amount of additional debt that Best Decade can take on to 30% of the total value of the shares it holds.

The debt limitation in particular is an unusual feature on exchangeable bonds. Best Decade doesnÆt have any other debt at the moment.

The structuring package not only helped the deal get out the door as a standalone credit without any guarantees from the listed company, but also proved to be a recipe for getting a deal done at a time when concerns about liquidity are again dampening the credit markets. Earlier in the week, Country Garden pulled a high-yield bond because the increased volatility meant investors were hesitant about submitting orders. The two-tranche deal, which was originally set to be the largest high-yield from a Chinese property developer at $1.5 billion, had already been guided downward to $1 billion by the seven bookrunners and the yield guidance had been increased.

The heavy structuring allowed Delong Chairman Ding Liguo to achieve an exchange premium of 32.08% over the volume-weighted average share price of S$3.0284 for the four-and-a-half trading sessions before the deal. The stock was suspended on Friday afternoon to complete the transaction. The premium was fixed at launch and gave an exchange price of $4 even.

However, with the share price on a rising trend over the past week, FridayÆs closing price was actually quite a bit higher than the VWAP at S$3.14, resulting in an actual premium over the latest market price of 27.4%. There is a possibility of a downward reset at any time, although this is entirely at the option of the issuer.

ôIt is quite a choppy market out there and you have to pick your window and take it when it opens,ö notes one source.

The bonds can be put back to the issuer after two years at a yield of 5.6%, or just above the mid-point of the offered range of 5% to 6%.

The bonds were, however, valued primarily in relation to the implied volatility on an outstanding renminbi-denominated convertible that was issued by Delong in May. The CB has a five-year maturity with a three-year put and currently trades at an implied volatility of about 30%.

Based on that, the exchangeable looked somewhat aggressive at a vol of 29.3%, but sources say investors tend to like financing trades like this one where the downside is also protected by the equity. The chairman will use the money to repay an existing bridge loan in full and for other potential investment purposes.

Depending what credit assumption investors used, the bond floor came out at about 93% to 94%. With the structuring terms in place, the bookrunner obviously didnÆt provide any credit bid, but most people were said to have used a credit spread of about 500bp over the Singapore Interbank Offered Rate (Sibor). The other assumptions included protection for dividend yields above 2.5% and a 1% stock borrow cost. The latter was a direct result of Citi making some stock available for lending and would have helped to push up the premium.

ôIn some ways, you sell this deal on the cosmetics. You want investors to look at the whole package, because if you focus just on the credit or just on the option, the trade doesnÆt work,ö the source says.

DelongÆs share price has come back slightly from the S$3.30 where it traded when it sold the CBs in May, but is still up about 332% this year in response to improving steel prices. If the share price continues to perform, the issuer can call the bonds after two years with the aim of forcing conversion, subject to a 130% hurdle.

The deal ended up about four times covered after only three-and-a-half hours with close to 50 participating investors. The bonds also traded up slightly to about 100.50 in the early evening Friday after the deal was completed.
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