WuXi AppTec picked the perfect day to sell a convertible bond, locking in pricing at the peak of the market before a sharp sell-off in Hong Kong stocks the next day.
The Chinese biotech company on Monday raised US$500m through a zero-coupon 363-day convertible bond priced at a conversion premium of 20.8% above the reference price of HK$66.24, from a 15%–25% range. There was no guidance range for the yield, which was fixed at zero.
The reference price was the price of a concurrent delta placement which was offered to the CB investors to hedge their positions. The term-sheet did not disclose the size of the delta placement, but a banker away from the transaction said it was US$69m.
The initial conversion price of HK$80.02 was a 15.97% premium to the October 7 closing price of HK$69.00, and the chances of hitting that level receded sharply when the Hong Kong market sold off on Tuesday.
The Hang Seng index dropped a staggering 9.4% on Tuesday as mainland China returned from its Golden Week holiday, and Hong Kong-listed shares of WuXi AppTec, which is also listed in Shanghai, plunged 16.9%.
Enthusiasm over China's stimulus packaged announced in late September had caused international funds to pour into Chinese equities. When the mainland markets closed on October 1 for the national holiday, Hong Kong shares kept trading higher.
Even though WuXi AppTec's Shanghai-listed shares gained 10% on Tuesday when the Shanghai exchange reopened, its Hong Kong shares sold off because they had been trading at such a steep premium to its A-shares – the opposite to the usual dynamic, in which H-shares trade at a discount.
When the CB was priced on Monday night, investors were expecting a further market boost from a press conference scheduled by China's National Development and Reform Commission on Tuesday morning. However, no significant market-friendly policy measures were announced at the presser, which was a factor behind the sell-off in Hong Kong stocks that day.
Despite the share price decline, the CBs were still holding up well in secondary trading at a cash price of 98 as of Wednesday.
"If I was an investor, I'd say I want more of this stuff," said a second banker away from the deal. "If you'd bought the shares in a block trade you would have got smashed, but with this you have downside protection. The CB has held up pretty well and the stock could still trade up in the next year."
The deal was six times subscribed with around 75 lines in the book, and demand from Asia and Europe. The majority of investors were hedge funds, as has generally been the case for Asian CB deals for the past 18 months, though only around half chose to hedge their positions.
Investors who hedged have actually seen the bonds become richer in the secondary market. The bond floor is 94.7.
By issuing the CB with a tenor of less than one year, WuXi AppTec did not need to go through the NDRC approval process for offshore bonds, which can take up to two months.
The second banker said other Chinese issuers would be encouraged to launch similar deals to lock in their recent share gains without needing to launch block trades at a discount – as well as benefit from interest-free funding. "It's an instrument fitting for the current market, but I don't think it's for every issuer," he said.
Hong Kong-listed companies are approaching earnings blackout periods at the end of the month or in early November, and the US election and next Federal Reserve meeting are likely to push back many deals until mid-November. On top of that, this week's sell-off in Hong Kong stocks may cause some companies to rethink their price targets.
WuXi AppTec had previously issued a five-year put-three convertible bond in 2019, but its share price appreciation after the deal meant that it had to carry a mark-to-market loss from the CB on its books. Selling a CB with a short tenor means issuers do not have to worry about the potential for a long-term drag on their balance sheets.
The company will use the CB proceeds for global expansion and debt refinancing.
Assuming full conversion, the CBs will convert into approximately 48.5m H-shares, representing around 11.14% of the expanded H share capital of the company.
Citigroup was sole global coordinator.
WuXi AppTec is one of the Chinese biotech companies that would be affected by the US Biosure Act, which would stop federal funds going to designated companies and those who do business with them. The US House of Representatives passed the bill last month, but it still needs to clear the Senate and be signed into law by President Biden, so there is no certainty it will be passed in the current form.
On Tuesday, WuXi AppTec responded to media reports that claimed it is considering selling its WuXi Advanced Therapies (WuXi ATU) business, a contract testing, development and manufacturing organisation. It said it is currently assessing its options and has not entered into any binding agreements.