HKEX to Issue $500 Million of Bonds to Finance LME Deal

Hong Kong Exchanges & Clearing Ltd. (388), the second-biggest bourse by market value, expanded a convertible bond issue by 25 percent on higher demand, helping to fund its purchase of the London Metal Exchange.

The exchange will sell $500 million of the bonds, up from the $400 million planned, according to a statement today from the bourse operator. The notes, which will mature in 2017 and pay an annual coupon of 0.5 percent, has an initial conversion price of HK$160.00 per share.

The $2.2 billion bid for the LME values the largest trading venue for industrial metals at 181 times earnings, making it the most expensive bourse acquisition exceeding $1 billion on record, according to data compiled by Bloomberg. Hong Kong Exchanges, which wants to maintain a debt-to-equity ratio not exceeding 50 percent, plans to refinance its borrowings for the acquisition through debt and bond issues.

“They’re still going to have to issue additional equity beyond the convertible” if they want to maintain the debt-to- equity ratio, said Sam Hilton, a Hong Kong-based analyst at Keefe, Bruyette & Woods Asia Ltd. “The math suggests that more than half of the balance of financing needed will need to be done via equity.”

Hong Kong Exchanges fell 2.5 percent to HK$115.90 at 11:28 a.m. local time, worse than the 0.16 percent decline in the benchmark Hang Seng Index.

Additional Financing

The exchange still has about $1.4 billion to finance for the deal, Hilton estimated. Scott Sapp, a spokesman for Hong Kong Exchanges, didn’t immediately respond to requests for information on additional financing needed.

“With the improvement in market sentiment in recent weeks, we saw a window to raise capital at a significant premium to our current share price,” Chief Executive Officer Charles Li said in the statement. “This convertible bond offering has allowed us to raise a substantial proportion of the longer-term capital required to fund our acquisition of the LME at favorable terms.”

The bourse signed a 543 million pound ($881 million) loan in June to help fund its LME purchase. The exchange arranged at least 1.1 billion pounds in short- and long-term bank facilities for the acquisition, which is seen as a way for the LME to expand into China, the world’s largest buyer of metals.

Yields on notes in the U.S. currency in Asia dropped to 4.13 percent last week, the lowest since November 2010, JPMorgan Chase & Co indexes show.

Convertible Bonds

Converting all of the bonds into stock will create about 24.2 million shares, or about 2.2% of the issued share capital of the company, according to the statement.

“The convertible bond is probably better than straight equity since they can issue at a premium to the current share price,” Hilton said. “But not as good as debt, since it still involves dilution.”

Proceeds from the issue will help reduce the amount of committed borrowings, the exchange said yesterday in a statement announcing the original $400 million sale. The company plans to keep a “prudent” debt-to-equity ratio not exceeding 40 percent to 50 percent, it said.

Deutsche Bank AG, HSBC Holdings Plc and UBS AG are the lead managers for the sale of the notes, according to the statement today.

The U.K. Financial Services Authority is reviewing the LME deal, and Hong Kong Exchanges will be entitled to redeem the bonds in the event it doesn’t get approval for the purchase within six months of the issue, according to the filing.

To contact the reporters on this story: Joshua Fellman in New York at jfellman@bloomberg.net; Eleni Himaras in Hong Kong at ehimaras@bloomberg.net

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net

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