China SOE uses rare structure to pull off $1bn Postal Savings EB

CSIC, working with global co-ordinators and bookrunners BNP Paribas and Citic CLSA, launched bookbuilding after Hong Kong markets closed for a $1bn seven year put four EB. The duo marketed the zero coupon paper with a 20%-30% exchange premium range and a 75bp-125bp yield, which translated into an initial exchange price of HK$5.784-HK$6.266 ($0.74-$8).

They were confident about covering the deal from the get go, having pre-marketed the trade to a small group of long-only and hedge funds. This resulted in robust interest, with indications of demand enough to cover the book before launch, said a source close to the deal. A large portion of the investors focused at the mid-point of the terms, the source added.

But it was the structure of the transaction that proved interesting. The EB was structured in a way to ensure the underlying Postal Savings Bank shares are untouchable by anyone other than the bondholders.

To make this possible, Citic CLSA created a vehicle to be the actual issuer of the notes. By linking the stock to the issuance vehicle rather than CSIC, investors are assured that it would be out of creditors’ reach were CSIC to default on any of its liabilities.

“The issuance vehicle does no investing or borrowing or anything else, so there is no way for creditors to go after it,” said the source. “The goal was to maximise investor protection and in turn get more favourable funding for CSIC.”

The structure is not new in the equity-linked market but is rarely seen from a Chinese state-owned enterprise (SOE). Companies have sold EBs with similar structures before, where they create a financing arm to hold the underlying stock, which is then deposited in a custodian bank and touted as being ring-fenced from the issuer. But typically, the stock is still controlled by the financing arm, in turn linked to the SOE, which allows creditors to access the shares.

The structure paid off. As Wednesday evening progressed, investors continued to pile into the deal, focusing their bids around the mid-to-low end of the exchange premium range. The bookrunners were marketing the bond with a 100 credit spread assumption, an implied volatility range of 17.4%-23.2% and a bond floor of 89.9-91.7.

When bookbuilding wrapped up, it was full of orders from global hedge funds and long-only investors, splitting the book 60% and 40%, respectively, with three-quarters of the long-only accounts from Asia. The final book comprised a total of 90 investors. The trade was subscribed three times at the bottom of the range, two times at the mid-point and covered at the top.

In response to demand, CSIC agreed to price the notes at the middle of the range, translating to a 25% exchange premium, 1% yield and an initial share price of HK$6.025. The pricing also represented a 90.8 bond floor, 20.3% implied volatility and theoretical value of 99.8.

BNP Paribas provided stock borrow for the full life of the bond. Given Citic CLSA’s vehicle was the issuer of the notes, the firm had to use part of its foreign debt quota granted by China’s National Development and Reform Commission.

CSIC has held Postal Savings Bank’s stock since it took the role of cornerstone investor in the lender’s $7.4bn Hong Kong IPO in 2016. CSIC decided this week was the time to monetise its stake as capital markets have been thriving. It also came with a longer than typical maturity for the equity-linked market, based on a view that financing costs could rise, said the source.

“The longer maturity is based on an expected move in the yield curve and potential rate hikes, with three or four expected in 2018 alone,” said the source. “So if you can lock in low financing, then you should lock it in for as long as possible.

“The success of the deal reflects how strong the equity and equity-linked markets are, while the debt markets are also very busy,” he added. “Issuers are getting good terms because of the strength of the two primary markets, so now we are working out ways through different structures to get good funding for issuers.”

CSIC’s outing is a boost for the market itself. More deals are on the way as the growing equity valuations drive up the attraction of equity-linked bonds, said bankers away from the CSIC issue.

“Equity valuations have reached a point where deals will be bigger because the valuations are higher,” said one Hong Kong-based equity-linked banker. “Once a few deals are done, others think ‘why shouldn’t I have a go?’ So I would be very surprised if we don’t see many more equity-linked deals this year than in 2017.”

Following CSIC’s issue, investors appeared to see some extra value in its EB, with the paper trading around par and above on Thursday, compared with the theoretical value of 99.8.

But the deal had some impact on Postal Savings Bank’s stock price, driving it down 2.9% on Thursday to close at HK$4.68. The shares had been up 16.5% year-to-date to Wednesday’s close.