China Evergrande switches to convertible bonds at last minute, pares it down to US$2.3 billion

The developer had to drop perpetual bond offer, which would have helped it deleverage

PUBLISHED : Wednesday, 31 January, 2018, 7:05pm
UPDATED : Wednesday, 31 January, 2018, 7:31pm

China Evergrande Group will issue a HK$18 billion (US$2.3 billion) 5-year convertible bond, pricing it at 4.25 per cent, revising down from a US$2.96 billion perpetual bond initially mooted, it said in a stock exchange announcement on Wednesday.

The convertible bonds, due February 2023, was priced at the top end of the indicative range pitched by banks involved in the deal, according to the revised term sheet.

The indicative range was revised upwards from 3-4 per cent earlier as reported by the South China Morning Post on Tuesday.

Initially, on Tuesday the joint-bookrunners of the deal – Citigroup, Haitong International Securities Group, Credit Suisse, Bank of America, UBS and Deutsche Bank – were pitching a more aggressive structure through issuing convertible perpetual securities, according to the term sheet seen by the Post.

Investors in such equity-linked instruments would have no guarantee that the issuer would pay a coupon because perpetual securities typically carry a coupon deferral option.

Top developer China Evergrande seeks US$2.9b from convertible perpetual securities issue

But, “if [China Evergrande] had pressed on with the convertible perpetual bond deal it would have been done at a much smaller size. Hence, the issuer focused on maximising the proceeds raised by tweaking the structure,” said a source close to the deal.

However, given China Evergrande Group’s debt reduction target of reducing debt ratio to 70 per cent by 2020 from 240 per cent stated in its June interim results of 2016, a convertible perpetual bond would have helped.

This is because perpetual bonds can be treated as equity on its balance sheet for accounting purposes. While there is no fixed redemption date to pay back investors’ principal – unlike a convertible bond – perpetual bonds help companies to raise capital without adding onto the group’s existing debt.

China Evergrande said in the stock exchange announcement that it would use the proceeds to refinance existing debt. Now with a convertible bond, industry players said it was likely to only benefit from a lower cost of debt, rather than deleveraging.

The convertible bond is now structured with a three-year put option, exercisable by investors at end of February 2021.

The conversion price is set at HK$38.99 per share, or a 40 per cent premium over the closing price of HK$27.85 quoted on Tuesday, when the deal was priced. Bondholders can start converting into shares starting March 2021.

Upon conversion, the new shares will represent 3.39 per cent of the company’s enlarged issued share capital. The bonds will be listed on the Singapore Exchange.

Shares of China Evergrande closed down 7.4 per cent at HK$25.8. The stock had a run of 470 per cent year to date before Wednesday’s drop.