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No Va Land shows CB hybrids are worth a shot

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By Jonathan Breen
24 Apr 2018

Vietnamese real estate developer No Va Land Investment Group pulled off the combined sale of a convertible bond and top-up share placement last week. The success of the hybrid fundraising structure means other potential issuers in the region should give it a close look.

The equity-linked bond market in Asia has gathered pace this year. So far in 2018, there have been 28 bonds over $100m printed in Asia ex-Japan, half of which were in China’s A-share market, according to Dealogic data. That figure is up from just seven transactions in the same period last year, of which only three were outside of China.

When property developer No Va Land ventured down the path of raising capital through an equity-linked and share sale combination last week, it only took things up a notch in the region’s equity capital markets. With its first ECM deal since listing on the Ho Chi Minh City Stock Exchange in December 2016, No Va Land raised around $314m — $160m from a five year non-call three CB and D3.5tr ($153.7m) through a top-up placement of primary shares.

A growing number of companies are now said to be looking at raising capital through a combined equity-linked and share sale.

It is hard to blame them. There are many benefits to this method of fundraising. A convertible is typically cheaper than traditional debt as the cash interest payment is lower, while if the notes are converted into equity, the issuer’s debt is wiped out. Selling new shares is also straightforward enough, as issuers can capitalise on a rally in their stock price and new investors can be enticed with a tasty discount.

If a company like No Va Land, less known to equity investors, tries to raise a large amount from one or the other product, there can be numerous challenges. For example, there is a smaller pool of investors looking at the equity-linked market, while a top-up placement can disgruntle existing shareholders because they are faced with a dilution to their positions. The problem of dilution ultimately follows the redemption of a CB, too.

That’s where a combined convertible and top-up approach can go some way to alleviating these problems. Less of the fundraising relies on a relatively smaller investor base. Stock dilution, meanwhile, is spread over the short and long term, which could help existing shareholders accept the immediate impact, particularly if they expect the company to use the capital raised to fund growth. The structure also helps optimise pricing, as companies may struggle to raise a meaningful amount from just equity or a CB.

The approach has already been tested in Asia to much success. Chinese real estate firm Country Garden Holdings is the only other issuer in the Asia ex-Japan region to take advantage of a CB and top-up approach this year, raising HK$23.5bn ($3bn) in January. Last year, companies such as Hong Kong-listed Semiconductor Manufacturing International Corp and Thailand’s Singha Estate used a placement/CB combo to raise funds.

No Va Land is a special case. Its deal is the first equity-linked bond in Vietnam in six years, breaking the lull that persisted since local conglomerate Vingroup sold a $115m five year in 2012, according to Dealogic data.

Given that the country’s equity-linked market has long been quiet, bankers do not expect a revival in issuance from Vietnam. But No Va Land’s deal should reassure other issuers in the region that are looking to tap the equity markets that a similar combination of fundraising is possible.

Talks around more of such issuance are starting to happen in Asia. It’s time to turn the words into action.

By Jonathan Breen
24 Apr 2018