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Tuesday, 18 June 2019

Riding the wave

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Surging demand for Chinese technology stocks in the US saw Qihoo take full advantage to increase the size of its offering of a convertible bond to over US1bn for it to rank as the largest equity-linked issue from an Asian entity in four years.

Surfers competing in the RS:X men’s windsurfing class sail upwind during the second race of the sailing competition in Beijing.

Riding the wave

Source: REUTERS/Pascal Lauener

Surfers competing in the RS:X men’s windsurfing class sail upwind during the second race of the sailing competition in Beijing.

Chinese software developer Qihoo 360 Technology is a good advertisement for the US stock market’s appeal for a fast-growing technology company.

Its latest convertible bond, priced at the end of July, was expanded to a hefty US$1.035bn, making it the largest international equity-linked deal from Asia in four years and underlining the scale of fundraising available for Asian technology stocks.

It also highlighted how far the company has come. Like many US-listed Chinese companies, it has been the target of short-sellers, especially after scandals at the likes of Sino-Forest Corp planted doubts in the minds of investors about the veracity of PRC accounting.

It managed to overcome a caustic research report from Anonymous Analytics in July 2012, which had claimed it would be forced to delist. Qihoo’s stock has gained more than 400% since then.

Qihoo had built rapport with investors after a US$600m CB in August 2013, which was also increased in size from a base of US$500m. Investors who had bought that bond made money and were happy to support Qihoo when it returned to market about a year later.

“We view Qihoo’s CB as the most impressive execution this year, as it was oversubscribed and traded above par, despite an aggressive structure and challenging market conditions.”

The company’s CB offering this year used a dual-tranche structure to create price tension. It told investors the total base size would be US$900m and each tranche, with tenors of six and seven years, would be at least US$300m in size, giving it flexibility to distribute the remaining US$300m between the two depending on demand.

The six-year tranche, with an investor put at the end of the third year, priced in the middle of the target range. The coupon was set at 0.50%, off guidance of 0.25%–0.75%, with the conversion premium at 37.5%, versus guidance of 35.0%–40.0%.

The seven-year bond, with a put after five years, priced with a coupon of 1.75%, from a range of 1.50%–2.00%, and a conversion premium of 32.5%, the low end of guidance of 32.5%–37.5%.

The six-year tranche proved the most popular, but the slightly cheaper pricing on the seven-year helped balance demand and, in the end, the two tranches were sized at US$450m apiece, with a US$67.5m greenshoe for each.

“We view Qihoo’s CB as the most impressive execution this year, as it was oversubscribed and traded above par, despite an aggressive structure and challenging market conditions,” said Jim McDonnell, head of equity-linked origination for Asia Pacific at Credit Suisse.

“Regarding the structure, Qihoo’s CB was the largest new issue since 2010, its average tenor was longer than nearly all other CBs of US-listed Chinese issuers, and the pricing was materially more issuer-friendly than Qihoo’s prior CB.

“On the day we were in the market, most equity indices were down around 2%, and Argentina went into default. The incremental demand generated by splitting the deal into two tranches helped overcome these challenges and also saw Qihoo smooth out its debt maturity schedule.”

At the final pricing, implied volatility for the 2020 bond was 36% and the bond floor 84.5, with credit spread assumed at 500bp. Implied volatility for the 2021 was 33% and the bond floor 77.0.

The offering drew a total order book of US$2.5bn–$3.0bn, with around 115 investors on the six-year tranche and 105 on the longer bond, although more than 75% of them bought both. Demand was broad, with some huge orders from Asian accounts.

Citigroup and Credit Suisse were joint bookrunners on the issue, which had to overcome strong headwinds. The stock plunged 7.9% on July 31, the day of pricing, due partly to hedging by CB investors, but also due to a sell-off in the tech segment that day. The Dow Jones Index dropped 1.9% and Google and Facebook were harder hit, falling 2.7% each.

The deal was opportunistic in terms of its timing, as Qihoo had no urgent need for funds. Alibaba Group had been expected to launch its US$25bn NYSE IPO either in late July or early August, but after the Chinese ecommerce giant made the decision to defer it until after summer, Qihoo sensed the chance to fill the gap in the market for Chinese tech. Squeezing in days before it was due to enter the blackout period ahead of its second-quarter results, it had the sole attention of tech specialists.

The offering pushed ahead, enabling Qihoo to stagger its upcoming maturities, leaving it with put dates in 2016, 2017 and 2019.

Size-wise, the issue beat the US$903m Lotte Shopping raised through its dual-tranche print in June 2011 to become Asia’s biggest international CB since China Unicom raised US$1.84bn in September 2010.

To see the digital version of this report, please click here.

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