Euroweek equity roundup, August 20

Euroweek ECM column, August 20 2010

CHAODA COMPLETES CONVERT/PLACEMENT/WARRANT COMBO

Chaoda Modern Agriculture completed the week’s most significant deal, a US$356 million capital raising made up of new shares, convertible bonds and call options. While enthusiastically received by investors attracted by apparently generous terms, it has triggered a sharp fall in the share price since.

Chaoda, a Hong Kong-listed company based in Fujian province which bills itself as one of the leading growers of fruits and vegetables in China, raised the funds to increase its production areas on the mainland.

Investor interest was focused on the convertibles, which were increased in size from US$150 million to US$200 million. The terms were attractive: five-year securities with a coupon of 3.7%, near the middle of a 3.25% to 3.9% range during pricing, and a conversion premium of just 7.5%, compared to price talk ahead of the deal of an up to 20% premium. What’s more, the 7.5% discount was to the share placement price, rather than existing stock – and the placement, which raised US$150 million at a bottom-of-the range price of HK$7.9065 per share, was already at a 12% discount to the previous closing price of HK$8.56. This theoretically meant that the convertible could be converted into equity at a discount to the existing share price, a rare offer indeed.

The catch was that investors in the convertible also had to buy not only stock but warrants as well, a series of three-year options that raised a further US$6 million and could in theory raise a further US$105 million for the company if exercised in full. This appears likely, as the strike price on the warrants was only 5% above the placement price, and they can be exercised at any point during their three-year term. Investors were given the option to buy shares only, but this proved less popular: a US$60 million upsize option for the equity side of the deal was not used.

Initial buyers were a group of anchor investors, subsequently joined by a wider range of investors but predominantly as a private placement. However their short term experience has not been good: by Thursday morning, the share price had slipped to HK$6.86, almost 20% down from the Friday night close before the deal.

Although the convertibles have a five-year term, they can be put back to the issuer at par after three years, with a 130% hurdle, and there is an issuer call of two years.

The convertibles continue a period of some vigour in the Asian CB markets despite the quiet August time of year. Just under a month earlier, China Agri-Industries Holdings had raised US$701 million through a convertible bond and placement combination, while a number of transactions are being talked about from Taiwan. ICBC has also received approval for a convertible (see briefs).

Citi was the sole lead on the deal.

Standard & Poor’s said the transaction would make no difference to Chaoda’s BB- rating. “We may raise the rating if we gain a better understanding of Chaoda’s growth appetite and funding plan, and believe that the company can maintain its financial metrics, including positive free operating cash flow, at a level that is appropriate for a higher rating,” the agency said. “We may revise the outlook to stable or lower the rating if Chaoda’s debt-funded growth strategy proves to be more aggressive than expected.”

INDIA DRIVES ACTIVITY

The pipeline in India continues to be among the most interesting in the region. As a Nasdaq IPO for MakeMyTrip and a GDR issue for travel agency Cox and Kings made successful launches, attention is increasingly focused on a landmark domestic IPO for Coal India.

Cox and Kings raised US$65 million in Luxembourg-listed global depositary receipts on August 17 through bookrunners India Infoline and Morgan Stanley. The deal priced at US$12.17 per GDR – equivalent to Rs569.17 per common share on the National Stock Exchange of India – and gives international investors exposure to an Indian travel business which, though only listed since December, traces its roots back for centuries. Since hedge funds tend to avoid Indian GDRs because they are time-consuming to convert, it was understood to have been taken up by long-only global investors.

Morgan Stanley was also at the helm of the Nasdaq IPO of MakeMyTrip, another Indian travel group, late last week. It raised US$70 million and climbed 89% on its first day of trading – and this after the IPO was priced at the top of its range of $12 to $14. At the time of the writing it was trading at US$32.79 – a 134% increase in a week.

Both businesses, like similar stocks in China, are plays on growing affluence and mobility in emerging markets. MakeMyTrip is an online business, Cox and Kings a traditional retail store-based chain.

While both deals were small, they illustrate appetite for Indian exposure, appetite that will be closely monitored by the bookrunners of Coal India – the forthcoming public sector IPO for which the draft red herring prospectus was filed with the Securities and Exchange Board of India last week. The deal is expected to raise up to Rs15,000 crore (Rs150 billion, or US$3.26 billion) and will potentially be the largest ever Indian IPO.

The 510-page draft prospectus reveals some interesting new steps. Chief among them is that shares will be sold to anchor investors for the first time in a public sector IPO. This is the usual practice among private sector listings, but is new in state assets, and reflects the growing institutional appetite for Indian paper. In the past, India has avoided this technique in case it appears that institutional investors get preferential treatment over retail buyers in state assets, but now it appears to have been acknowledged as an effective way of ensuring demand and distribution. The prospectus shows that a total of 631.6 million shares will be sold, with just over one tenth (63.2 million) reserved for employees, 284.2 million to qualified institutional buyers (QIBs), 85 million to non-institutions (which typically refers to high net worth buyers) and 199 million to retail. Within the QIB tranche, 30% of the shares will be available to anchor buyers, one day ahead of the float.

The advantage of doing it this way is that it pushes momentum into the offering if it is clear that big institutional buyers are coming into the deal. Furthermore, recent deals have not advantaged anchor investors over retail; indeed in the recent SKS Microfinance IPO, the anchor buyers ended up paying slightly more.

More than offering Indian exposure, it offers something even more keenly sought after: Indian infrastructure exposure. There is no obvious equivalent already trading in India. Those close to the deal expect a launch between October 18 and 21. Six bookrunners have been mandated: internationals Bank of America Merrill Lynch, Citi, Deutsche Bank and Morgan Stanley, alongside locals Enam and Kotak Mahindra. As is commonplace in the Indian capital markets, market talk suggests very low fees will be paid to the bookrunners.

BRIEFS

ICBC

China’s vast forthcoming bank rights issues are moving closer to launch as regulatory approvals come through. Two weeks after China Construction Bank received approval from the China Banking Regulatory Commission for a rights issue of up to RMB75 billion (US$11 billion), Industrial & Commercial Bank of China received approval from the China Securities and Regulatory Commission to issue up to RMB25 billion in convertible bonds (convertible into the Shanghai-listed shares rather than the Hong Kong ones). The convertibles will be part of an up to RMB70 billion capital raising through debt and shares in Shanghai and Hong Kong. Bank of China also has a jumbo rights issue pending.

ABC

Meanwhile the fourth of China’s big four banks, Agricultural Bank of China, this week formally became the world’s largest IPO after the greenshoe on the A-share issue was fully exercised, selling a further 3.34 billion shares at the IPO price of RMB2.68. This added RMB8.94 billion to the sums already raised in Shanghai and Hong Kong, bringing the overall total to US$22.1 billion. ICBC raised US$21.9 billion in 2006.

INDOFOOD

The process has begun for the IPO of Indofood CBP (consumer branded products), a spin-off from the  packaged food group Indofood Sukses Makmur. The deal could raise as much as US$500 million and, like the Rp1.36 trillion IPO from Berau Coal earlier this month, represents the growing momentum in Indonesian equity issuance this year. Krakatau Steel and Garuda Indonesia are still expected to launch IPOs themselves in the fourth quarter of this year. Credit Suisse, which was a lead on Berau Coal, is joint bookrunner with Deutsche Bank and Kim Eng Securities.

WEST CHINA CEMENT

Deutsche Bank and ICBC International led a Hong Kong IPO for West China Cement, raising HKR1.39 billion (US$179 million). West China Cement is listed on AIM, but will delist on August 23 and start trading in Hong Kong the same day. The deal was priced at the top of a HK$1.21-1.69 pre-marketing range; the retail offer is believed to have been more than 130 times covered.

PRUKSA

Pruksa Real Estate raised Bt2.99 billion (US$94 million) in a secondary share offering on August 17, the largest deal of its type from Thailand so far in 2010. Phatra Securities led the deal for the residential property developer, and upsized the deal from 100 million to 130 million shares on the back of demand. Also in Thailand, Sri Trang Ago-Industry, a rubber company, is roadshowing ahead of a new dual listing in Singapore which will raise up to S$252 million, mainly from international investors. Pricing will be set on September 1 for the sale of 280 million new shares, equivalent to 22% of enlarged share capital, and DBS is the sole bookrunner.

TIGER

Two substantial shareholders in Tiger Airways, Indigo Singapore Partners and Ryanasia Limited, along with president and CEO Tony Davis, have sold down 65.796 million shares in the airline at S$1.90 per share, a 4% discount to the market price and the top of the price range. Citi and Morgan Stanley handled the deal, which raised just over S$125 million.

KOREA

Shareholders in Korea’s Mando Corporation yesterday set about selling almost 3.4 million shares and potentially raising W429 billion (US$366 million) in a secondary placement for shareholders H&Q and KDB Private Equity, both of whom are selling out in their entirety. The price range is W122,000 to W127,000 per share, a 2.3% to 6.2% discount to Thursday’s W130,000 closing price. Citi, Macquarie and Morgan Stanley are leading the sale; Citi was also a bookrunner on the company’s IPO in May.

Also in Korea, Fila Korea is reported to be planning an IPO in September or October, with documents expected to be filed to the regulators within the next two weeks. Samsung Securities is understood to be the sole lead at this stage.