Friday, 22 March 2019

Structured Equity Issue

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Six years after regulators introduced the format, China’s first exchangeable bond opened a new avenue for capital raising and added another tool for the country’s reform of its sprawling state-owned enterprises.

Baosteel’s Rmb4bn (US$650m) EB, exchangeable into shares of China’s third-largest insurance company New China Life, was an innovative way for SOEs to monetise their non-core assets.

The structure took on further significance after China banned most share sales to stem the summer stock-market rout, becoming the only way for major shareholders to offload their stakes.

China published guidelines for EB issuance in October 2009, but no public deal was attempted before Baosteel decided to use the innovative tool to reduce its non-core investment in December 2014.

As with any pioneering transaction in China’s capital markets, the deal required extensive communication with various regulatory bodies and thorough investor education. Baosteel’s process was more complex than most, since the deal combined elements of equity and debt and crossed multiple industrial sectors.

Even before it set out to convince investors, the company needed the blessing of no fewer than five separate regulators.

Joint bookrunners CICC, Credit Suisse Founder Securities and UBS Securities proposed a fixed coupon, instead of the step-up structure typically used in Chinese convertible bonds.

“As an innovative product, the terms should be as simple as possible to allow investors to understand it better,” said Huang Zhaohui, managing director of investment banking at joint bookrunner CICC, at the time. “A fixed-rate coupon allows investors to enjoy higher returns in the early years.”

Having soared 25% in a month, the Shanghai Composite Index suffered a deep correction just as Baosteel began marketing the EB in the morning of December 9. The index lost 5.43% that day, while shares of NCL fell 10% to daily trading limit.

Still, the institutional tranche of the deal was 27 times covered, allowing the issuer to price the coupon at the bottom of the 1.5%–3.5% range. The conversion premium, set before bookbuilding began, was 9.35% over the previous close, meaning investors needed to be confident of a rebound in the stock.

Riding on the overwhelming response to Baosteel’s offering, and the fact that CSRC was still allowing EB issues after freezing most share sales in July, more issuers followed its lead in 2015.

At the time of writing, three other companies had raised a combined Rmb7.2bn from public EBs in 2015.

Both Baosteel and the EBs have AAA ratings from Chengxin.

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

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