Increased market volatility and positive returns on equity-linked deals so far this year are driving convertible bond issuance in Asia, with WuXi AppTec’s US$300m transaction last Tuesday the latest to attract strong demand.
The Hong Kong and Shanghai-listed Chinese contract medical researcher priced the five-year put three CB at issuer friendly terms, with the coupon and the yield set at the bottom of the respective 0%–0.5% and 1.25%–1.75% ranges. The CB converts into Wuxi AppTec’s H-shares.
The conversion premium was marketed and priced at 30% above the reference share price of HK$86, the pre-deal close.
The books were seven times covered with more than US$2bn of demand. Close to 100 investors participated in the transaction and there was no sensitivity in the books.
“We have multiple orders of US$100m … Frankly, we were amazed at the response that we got. It was quite staggering, absolutely a blowout,” said a person close to the deal.
People on the transaction attributed the positive outcome to scarcity.
“Increased volatility did help but the rarity value of the issue was the main reason for the deal’s success. The healthcare sector is under-represented in equity-linked products and investors are very bullish on the sector. The stock has been doing very well too,” said one of the people.
Wuxi’s H-shares were up 75% year to-date before the deal launched. The stock closed at HK$84.75 last Thursday.
“The US equity-linked market just had its busiest month with US$9bn to US$10bn of issuance,” said another person close to the deal. “Investors are clearly there and they want to deploy capital. They want to have exposure to China, especially the new economy sector, but avoid trade-war assets.”
Allocations were very concentrated, with the top 10 investors – mainly wall-crossed accounts – large long-only investors and existing shareholders, taking almost 65% of the deal. Overall, long-only investors received 60% and hedge funds 40%.
The Wuxi CBs traded well in the secondary market, changing hands at about 102–103.
Other deals have also done well in the aftermarket. Equity-linked bankers said around 90% of the issues in 2019 were trading above water, giving investors a strong reason to invest further in the instrument.
“Only a few deals didn’t do well … We estimate investors have enjoyed about a 10% return on average so far this year,” said a banker.
As of last Thursday, 23 equity-linked deals had raised a combined US$9.4bn in Asia-Pacific ex-Japan so far this year, the second highest volume since 2015. In the full year of 2018, 35 issues raised a total of US$15.7bn.
“Last year’s numbers were skewed heavily by a few sizeable real estate transactions such as Evergrande and Country Garden,” said another banker. “We are unlikely to beat that but I would argue this year is a better year as we have more representation across sectors and better returns for investors.”
Bankers are generally positive about the outlook for equity-linked markets in the remainder of 2019, with issues likely to come from the TMT, pharmaceutical, education and consumer sectors.
“When markets are volatile, the equity-linked product is an instrument that makes sense to investors because of the downside protection. It’s also very attractive in terms of cost of capital to issuers … I expect more deals to come. The question is whether the markets will remain supportive,” said a third banker.
For the Wuxi deal, the credit spread was assumed at 250bp, the stock borrow at 5%, implied volatility at 30.7%, fair value at 102.2 and the bond floor at 92.5.
There is a lock-up of 90 days on the issuer.
The company plans to use the proceeds for mergers and acquisitions, business expansion, working capital and general corporate purposes.
Goldman Sachs, Huatai International, JP Morgan and Morgan Stanley were global coordinators while SPDB International Capital was co-manager.