Euroweek equity capital markets round-up, September 24

Euroweek Equity capital markets – September 24 2010

CONVERTIBLES

The revival of the Asian convertible bond market continued this week with two significant new deals from Chinese issuers.

Intime Department Store raised HK$1.941 billion (around US$250 million) in an issue of 1.75% convertible bonds due 2013 on the Hong Kong Stock Exchange in a deal that priced on Monday.

The same day, Hengdeli Holdings, the branded wristwatch retailer and distributor, raised HK$2.5 billion (US$322 million) in five-year convertibles, with a put back to the company after three.

Both deals were upsized: Hengdeli had started out with an HK$1.95 billion deal, Intime with US$200 million. Intime’s transaction, with Bank of America Merrill Lynch, Morgan Stanley and UBS as bookrunners, priced with a 28% conversion premium over the September 20 closing price, was covered in less than an hour and was ultimately three times covered. Both its coupon (a 1.25%-1.75% range) and yield (3.5% to 4%) were priced at the top of marketing ranges, and the conversion premium at the bottom of a 28-33% range. Most interest came from outright investors despite the provision of a stock lending agreement.

Hengdeli’s deal, led by Standard Chartered and JP Morgan, offered a 20-30% conversion premium over Monday’s close and settled on 23.5%; a 2.25-2.75% coupon, settling on 2.5%; and a yield of 3 to 3.5%, eventually pricing at the top. This deal was bought by outright and hedge fund investors despite the lack of borrow available, and was balanced between European and Asian demand. Although it was not fully upsized, that was not down to demand, with the deal many times oversubscribed through over 150 participating accounts; “A larger deal could have been done bye they only had so much room left in their share mandate and that capped them on size,” says someone close to the deal.

The success of both deals in attracting good terms for the issuer and upsizing on the back of demand, coupled with the fact that both deals traded up after launch, reflects the momentum in the Asian convertible bond markets after a slow period of several months. This week’s deals follow successful issues for Shui On Land, LG UPlus and Maoye International in the previous 10 days. Some bankers attribute this revival to the return of the European investor base, which had disappeared from sight during the Southern European debt crisis. Additionally, it is believed many convertible issuers want to get their deals through before some of the bigger IPOs and other capital raisings start hitting the markets next month.

“There is more in the pipeline, definitely dominated by China and Hong Kong,” says a banker.

Commodity listings

A slew of mining and commodity-related companies are launching IPOs in Asia, reflecting the growing momentum of Asian mineral wealth as a driver of the world economy.

On Tuesday, IRC Limited, an iron ore miner active in far eastern Russia, began a management roadshow and institutional book build ahead of a Hong Kong IPO that could raise as much as HK$4.57 billion (US$588.8 million) in a spin-off from London-listed gold miner Petropavlovsk. It will price on October 6, New York time, with first trading taking place on October 14. Investor education has been underway since September 10.

Joint bookrunners BOC International, Bank of America Merrill Lynch and UBS have set out with a rather broad indicative price range of HK$2.20 to HK$3. The sale will start out with 1.325 billion shares (80.8% of them new), with a greenshoe that could potentially take the total to 1.523 billion shares (83.3% of them new). There will be an intended 90/10 split between the international offering and a Hong Kong public offer, but with clawback triggers it could end up at 50/50 depending on the subscription levels in the public offer. Two cornerstone investors, MHL (a subsidiary of Asia Resources Fund, managed by the General Enterprise Management Services private equity fund) and CEF (a vehicle half owned by Cheung Kong and half by Canadian Imperial Bank of Commerce), have pledged to subscribe for their entitlements for an aggregate US$60 million.

Although the company’s mines are in Russia, it is seen in some sense as a China play since the mines are near the Chinese border near to rail lines that link the two countries. Another country in that area that is seen as a China mineral consumption proxy is Mongolia, whose leading coking coal producer, Mongolian Mining Corp, is on the road marketing another Hong Kong IPO. A Hong Kong public offer opens on September 28; books close on October 4; and listing takes place on October 13.

This deal, led by JP Morgan and Citi, involves a base size of 719.4 million shares, 90% of them international, with a further 15% overallotment offer. As in the IRC deal, clawback triggers will apply around the Hong Kong public offering. At a price range of HK$6.29 to 7.34, it could raise $780 million if the overallotment offer is exercised.

While some Mongolia offers have struggled in Hong Kong, particularly after launch, MMC’s backers are hopeful that they are differentiated. MMC, which runs a mine in the world’s largest coking coal deposit in Tavan Tolgoi, was profitable in its first year of operation in 2009; JP Morgan reckons its net income, which was US$10 million in 2009, should hit $68 million in 2010 and $260 million in 2011. It is moving away from the third party traders who wash coal before selling it to end users such as PRC steel mills, taking a high margin in the process; it will have its own washing plant operational from next March which will enable it to sell to end users directly. The company also has long term coal offtake contracts with five big end users.

An example of those third party traders is Winsway Coking Coal, which provides transportation, washing and blending for the coal industry and specialises in Mongolian/Chinese cross-border trade. Winsway is seeking a Hong Kong IPO of its own, which could raise US$660 million if a 15% greenshoe is used in full (its base raising will be between US$414 million and $574 million based on the marketing range of HK$3.25 to HK$4.50 per share). Deutsche Bank, Goldman Sachs and Bank of America Merrill Lynch are joint bookrunners on the deal, which will be priced on September 29 New York time and will begin trading on October 11. One of the shareholders in Winsway is the powerful Chinese private equity fund Hopu Investments.

A Chinese aluminium alloy manufacturer, Midas Holdings, is seeking a listing of its own in Hong Kong, secondary to the one it already holds in Singapore. CCB International, Credit Suisse and JP Morgan are leading a sale of 220 million shares – 90% new and 10% secondary, representing 18.58% of the company’s enlarged share capital – in a deal that could raise US$200 million if an additional 15% greenshoe is used. Midas makes the bulk of its money selling products to Chinese railway companies for use in high speed trains and metro train car bodies, according to filing documents.

Far bigger than any of these deals will be Coal India, whose IPO – potentially India’s biggest ever – cleared a hurdle this week when the Securities and Exchange Board of India approved its issue. The deal is expected to raise over US$3 billion late next month.

New IPOs

The first two of a raft of new Indonesian equity issues have completed successfully in news that will give confidence to other pending issuers.

Indofood CBP, part of the Indofood Sukses Makmur group, raised Rp6.29 trillion (US$700 million) after pricing at Rp5,395 per share, near the top of a Rp4,300-5,500 range. Enthusiastically received, it attracted almost 400 institutional investors attracted by the Indonesian consumption play represented by the company, which markets packaged foodstuffs such as noodles. It was mainly sold internationally and to long-only accounts, reflecting the fact that investors were buying it because of belief in the company and the broader Indonesian economy story. “We are seeing net inflows from foreigners into the equity markets week after week. They want exposure to Indonesia because they believe this performance is much more durable than in the past,” says one banker in Jakarta. Credit Suisse, Deutsche Bank, Kim Eng Securities and Bank Mandiri led the deal, with Mandiri handling the domestic end.

The coal mining group Harum Energy was marketed at the same time as Indofood CBP and succeeded in raising Rp2.6 trillion (US$290 million) in its listing, although at the lower end of its price range. It priced at Rp5,200 per share from a Rp5,000 – 6,300 range, and an upsize option of 150 million shares was not used. Nevertheless the deal attracted institutional interest, and was chiefly sold internationally. Deutsche Bank and Goldman Sachs led this deal alongside Ciptadana and Mandiri domestically.

Other IPOs in the region continue to go well. Trony Solar became the second Chinese renewable energy company in a week to cover its entire IPO on the first day of a roadshow after China Ming Yang Wind Power (see recent editions of Euroweek). Trony Solar is on the road with an up to HK$1.73 billion (US$223 million) IPO – this after abandoning a New York IPO late last year. The IPO is being offered in a HK$3.10-4.50 price range by arrangers CLSA, JP Morgan and ICBC International, and will set its price on September 30, though a price near the top of the range seems a certainty.

Chinese companies venturing to the US are being warmly welcomed too, with SouFun Holdings, which runs a real estate website, raising US$125 million on a New York Stock Exchange listing after pricing at the top of its marketing range. The stock then climbed 72.9% on its first day of trading. Deutsche and Goldman Sachs arranged this deal.