Wafer thin pricing for Henderson Land

Another year another large, aggressively priced convertible from Asia.

Henderson Land secured the most aggressive negative yield structure in the Asian convertible universe yesterday with the pricing of a HK$5.75 billion ($737 million) deal via Goldman Sachs. Like every large convertible put out to competitive bid, final terms were controversial and the deal needed to be re-priced before it could clear the market.

Three banks - Credit Suisse First Boston, Goldman Sachs and Morgan Stanley - are believed to have bid for the mandate, with Goldman awarded the deal on Wednesday after pitching the most aggressive put price - the main variable. A deal was subsequently launched at par after Asia's close Thursday, only to be re-priced at 99% three hours later, before closing just under two times covered.

Terms comprise a two-year final maturity with a coupon of 1%, a one-year put at 92% and redemption at 82% to give a negative yield of minus 8.37% (based on a par issue price). There is also a call option after six months subject to a 120% hurdle.

In terms of the conversion premium, the deal was marketed on a 20% to 22% indicative range and priced at 20% to the stock's HK$40.8 spot close.

Underlying assumptions show a bond floor of 92.1% and implied volatility of 33.2% (par issue price) or 32.1% (99% price). These assumptions are based on a credit spread of 50bp over Libor, dividend protection above 2%, a stock borrow cost of 75bp and 260 volatility of 35.4%.

Hedge funds' main sensitivity appears to have centred around having to pay eight points for a fully valued one-year option on a low volatility stock. As one bond specialist comments, "It's a lot to pay for a short dated option and investors would have been asking themselves how likely volatility levels are to rise. Global volatility levels are currently still falling and compounding this, property is considered a low vol sector."

"This is also a sizeable deal," the specialist continues. "As such, once the lead starts selling a large amount of volatility, investors put on hedges and volatility levels come down even further. If you look at where Henderson Land options are trading in the OTC market, it would suggest that an implied volatility level in the high 20's or touching 30 would have been more appropriate."

For outright accounts, the main issue would have been the potential for stock price performance given Henderson Land's rise from a low of HK$18.15 in March last year to HK$40.8 at the time of pricing. Says one banker, "If you're concerned the sector has reached a peak, then you have eight points of downside, only a year to make money and the loss of 20% upside. It's not a screaming buy."

Yet, most agree that final terms only marginally erred over the edge and Goldman certainly tried to rectify the situation by sacrificing a chunk of its 1.75% fee to ensure the deal cleared the primary market. Where the transaction then went on to trade in the secondary market is open to debate.

While some claimed it was bid marginally above issue price at 99% to 99.25%, London-based brokers were seeing a market around the 98% to 98.375% level.

However, the real test will be how successfully the deal beds down over the first few days of secondary trading after knee-jerk selling pressure eases. The greenshoe was fully exercised at launch and about 50 investors were reported in a book, which split roughly 40% offshore US, 35% Europe and 25% Asia.

For Henderson, a convertible structure certainly made sense given it was not keen to raise straight equity again so soon after last autumn's placement. The issuer is also likely to be extremely happy with the terms it was able to achieve.

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