Proof of concept
A HK$4bn (US$510m) green convertible bond from Hong Kong’s Link REIT set a precedent for green financing in Asia’s equity-linked market.
Link, which owns shopping centres, car parks and offices in Hong Kong and China, launched the five-year put-three CB on March 7, kicking off a run of equity-linked issuance from Asia’s REIT sector.
Coming after Japanese timber company Sumitomo Forestry introduced the green GB concept with a ¥10bn (US$90m) print in September 2018, Link’s far larger offering is the first major sign that the equity-linked market can play a role in the transition to a more sustainable future.
The potential for equity conversion has been a hurdle for green CBs finance, but second-party opinion provider Sustainalytics said the structure had no bearing on the impact of the assets or allocation of proceeds. Link said it would use the proceeds to develop cleaner buildings and improve its existing portfolio. Its targets include a 35% reduction in energy usage from 2010 to 2020.
Link captured an optimal market window, pricing the deal after its unit price had rallied 35% in the previous 12 months and amid a dearth of new issuance in Asia’s equity-linked market.
Investors were price-sensitive, given the strong run-up in Link’s unit price. The deal priced at the investor-friendly end of the 0.8%–1.6% range with a fixed conversion premium of 22.5%, and a HK$1bn upsize option was not exercised.
As a REIT, Hong Kong-listed Link is prohibited from actively marketing any offering in Europe unless it is previously registered with regulators. Link decided against a filing in order to avoid any delay, but instead made a public announcement after markets closed in Hong Kong – an unusual move on an Asian new issue. This caught the attention of long-only investors in Europe, a key group of potential buyers, who quickly approached the leads for additional information.
There were just under 30 investors in the book, with two-thirds of demand coming from Europe and the rest from Asia. Allocations were skewed towards long-only funds with the top five investors taking close to half of the deal.
The timing gave Link first-mover advantage in a busy year for REIT financings. A flurry of CBs or exchangeable bonds followed within weeks, and several were met with tepid interest from investors, with some even reoffered at a discount to clear the market.
The Link CB reached a high of around in 103 in late June and also proved resilient to a 20% fall in the REIT’s unit price from July 5, ending IFR’s review period around 98, above the bond floor of 96.1.
HSBC and JP Morgan led the deal, with HSBC advising on the green structure.