A trade is a trade, warts and all
Sunshine 100 China Holdings printed a $200m convertible bond last week that drew flak for the inherent weaknesses in its structure. But although it defied what many consider to be “proper” CB execution, look past the criticism and it’s clear that the equity-linked market is open for business — even when the trade is off-kilter.
Talk about going against the grain. Even in an up and down year like this in the Asia ex-Japan equity-linked market, some market watchers think Sunshine’s CB should not have been a trade at all.
For starters, they say it’s difficult to ignore the illiquidity of the underlying shares. With only half a million shares trading a day, the CB is indeed a curio. In addition, the lack of stock borrow was a big turn off for hedge funds, as they lose the ability to short the stock or work any arbitrage around the transaction.
For traditional outright funds too, the CB seemed to offer few incentives. The issuer’s credit, which S&P Global Ratings puts at B-, pales in comparison to some of the investment grade issuers that have frequented the market this year. And with only one broker covering the stock, the transaction looked ill-supported.
Add to that Sunshine’s decision to pick a syndicate consisting only of Chinese banks, which are not known for their CB prowess, and it’s no wonder that bankers away from the trade were dismissive of the deal.
But Sunshine deserves more credit than that. Even if it’s not everyone’s cup of tea, it still proves that oddball deals have a market.
The critics would do well to pay attention, especially given how quiet things have been in the new issuance front. With the mood on CB desks in Asia far from sunny, coupled with the outlook that issuance won’t rise dramatically in the second half of the year, trades like Sunshine’s will, if nothing else, help lift volumes.
Year-to-date, equity-linked offerings in Asia ex-Japan ex-onshore China have raised $4.05bn via 53 transactions, compared with 90 deals worth $4.36bn in the same period last year, according to Dealogic.
The trick, as Sunshine’s deal showed, is to keep investors engaged. Despite the hurdles, the leads were on top of the transaction — wall-crossing investors so that the property developer could launch with fixed terms and enough visibility on demand.
And despite the illiquidity, Sunshine knew how to entice investors. Its five year put three CB was marketed with a 6.5% coupon and a conversion premium of just 10%, terms that even bankers away had to admit was juicy. Moreover, the put option meant returns could vault to as high as 8.5% — among the highest for equity-linked debt in the region this year.
The book was dominated by Chinese investors. But this was only expected given they were the accounts targeted from the start, and benefited by gaining rare exposure to a high yield CB.
The truth remains that the CB market desperately needs deals, and Chinese property names could potentially be big players given the savings they can achieve. For example, Sunshine raised $115m via a 2017 straight bond in September 2014, selling the notes at a hefty coupon of 12.75%. In comparison, it only paid 6.5% for the CB, proving that pockets of demand continue to exist – even for quirky trades.
Clearly, there are opportunities if one cares to look. Sometimes that just means looking for them in hard-to-reach places.