Hong Kong’s first big exchangeable bond of the year showed the equity-linked market’s ability to deliver solutions in even the most challenging of situations.
Shanghai International Port Group’s US$1bn bond, exchangeable into Hong Kong-listed shares in Postal Savings Bank of China, effectively allowed it to offload almost half of its IPO investment above the listing price.
That was no mean feat in a stock that had performed poorly since its debut and was thinly traded: the underlying equity represented over 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 just six cornerstone investors, leaving liquidity in short supply.
For SIPG, waiting for PSBC’s shares to recover was not an option. The port operator had borrowed to finance the cornerstone investment, taking loan s 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, SIPG faced a problem: how could it offload a big chunk of shares in a notoriously illiquid stock without losing heavily?
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 sizable position.
To boost the appeal further, SIPG agreed to provide a structured stock borrow facility which capped the cost assumptions in investors’ models, allowing outright investors to be aggressive knowing that borrow costs were under control.
The EB attracted healthy demand from global investors, particularly outright investors, 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.
Each tranche of the EB can be exchanged for 698m shares of PSBC. In other words, SIPG has monetised about 42% of its investment.
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