Sailing into the wind
Hong Kong’s first big exchangeable bond issue of the year showed the equity-linked market’s ability to deliver solutions even in the most challenging of situations.
Shanghai International Port Group’s US$1bn bond offering, exchangeable into Hong Kong-listed shares in Postal Savings Bank of China, allowed it effectively to offload almost half of its IPO investment above the listing price.
That was no mean feat for a stock that had performed poorly since its debut and was thinly traded: the underlying equity represented more than 160 days’ trading volume, based on average turnover for the previous month.
SIPG put up HK$15.9bn (US$2.03bn) as a cornerstone investor in PSBC’s HK$59.1bn IPO in September 2016, buying 3.35bn shares at HK$4.76 each.
The stock, however, tumbled below the IPO price once the stabilisation period ended, and has struggled to regain parity. PSBC, China’s biggest bank by number of branches, sold 76.8% of the IPO to six cornerstone investors, leaving liquidity in short supply, and investors had plenty of other options in the Chinese financial sector.
For SIPG, waiting for PSBC’s shares to recover was not an option. The port operator had borrowed to finance the cornerstone investment, taking loans from BOC International, HSBC and JP Morgan, according to a regulatory filing at the time.
With a September maturity looming on part of that loan, and Chinese regulators maintaining a tight grip on outflows and offshore borrowing, SIPG faced a problem: how could it offload a big chunk of shares in a notoriously illiquid stock without losing heavily?
The lack of liquidity in the stock made a straight sell-down difficult. Sole bookrunner Deutsche Bank came up with the idea of an exchangeable bond, which can be exchanged for H-shares of PSBC at a strike price above SIPG’s IPO investment.
The zero-coupon offering, which hit the market on July 26, was split into a US$500m four-year put two and a US$500m five-year put three. The dual-tranche structure effectively allowed SIPG to target different groups of outright accounts – essential in reaching the US$1bn target.
The low trading volume of PSBC made the EB attractive to some investors, as it was almost impossible to build a sizeable position in the lender given its thin trading volume.
To increase the appeal further, SIPG agreed to provide a structured stock borrow facility that capped the cost assumptions in investors’ models.
The EB attracted healthy demand from global investors, particularly outright investors from Europe, allowing SIPG to price the deal off the bottom of the range.
The yield-to-put/maturity of the four-year EB was priced at the wide end at 0.75%, while the five-year EB came at the midpoint at 0.75%. The exchange premium of both tranches was 20%, the midpoint of the marketed range, with the initial exchange price at HK$5.592 per share.