Shun Tak Holdings on Thursday completed the first convertible bond by an issuer with exposure to Hong Kong real estate in 16 months, attracting some demand because of a perceived scarcity value. The company also has real estate developments in Macau as well as other assets related to the tourism industry in the former Portuguese colony, including the main ferry service between Hong Kong and Macau, which means it offers an alternative way to play the casino boom without owning a gaming company.
Investors also liked the Hong Kong dollar-denominated CB because it was priced competitively. Some analysts estimated the theoretical value at above par, and those estimates were backed up by the fact that the CB traded up on Friday—despite a significant slip in the share price. At the end of Hong Kong trading, the bonds were quoted at above 102. That said, this was the first publically marketed CB by an Asian issuer this year to fix both the coupon and the conversion premium in the investor-friendly half of the indicated ranges. One CB specialist noted that the deal was priced more aggressively than other CBs with limited or no stock borrow such as those from Chinese real estate developers Yanlord Land Group and SRE Group in June. This suggests that the company too got a pretty good deal.
Shun Tak offered HK$1.395 billion ($180 million) worth of convertible bonds, with an upsize option of HK$155 million, which was exercised on Friday for a total deal size of HK$1.55 billion ($200 million). The bonds mature in five years, but can be put back to the company on the third anniversary at par. There is also an issuer call after three years, subject to a 130% hurdle. The bonds have a par-in-par-out structure, which means the coupon is equal to the yield.
The coupon was offered in a range between 3.25% and 3.75%, and fixed at 3.3%, while the conversion premium was offered at between 21.6% and 26.6% over Thursday's closing price of HK$6.58. The premium was fixed at 24.3% for a conversion price of HK$8.18.
One source said the deal was "significantly oversubscribed" by a mix of outright investors and hedge funds. Because of a limited amount of stock borrow available, many of the hedge funds were also buying on an outright basis, however. All in all, about 60 investors participated in the trade.
Credit Suisse, which was the sole bookrunner, marketed the bonds with a credit spread of 500bp over Hibor, and although some analysts argued for a wider spread of up to 700bp, this didn't seem to have had much impact on the demand. CB holders will be compensated for dividend payments exceeding a 1% dividend yield, which is more than the yield the company is offering at the moment, and given the limited borrow, the stock borrow cost was assumed at 5%.
This resulted in a bond floor of 90% and an implied volatility of about 30%.
Shun Tak's share price dropped 6.7% on Friday to HK$6.14. However, the stock has gained significantly from its low of HK$1.28 in November last year and is still up 380% this year. That said, the gains come on the back of a sharp drop in 2008 and the stock still has some way to go to return to the HK$11 to HK$13 range that it was trading in during most of 2007.
Analysts are generally positive on the company, as indicated by the eight "buy" recommendations on the stock, versus two "hold" and one "sell", according to Bloomberg.
In a research note following the release of Shun Tak's first-half earnings last week, analysts at J.P. Morgan said they remain positive on Shun Tak as they believe the Macau news flow will stay strong on the back of a relaxation of travel restrictions, a strong rebound in gaming revenues and the inauguration of the new Macau chief executive at the end of this year.
They also expect a pickup in core earnings in the second half of 2009, thanks to the booking of HK$1.2 billion in net profit from the sale of units at One Central in Macau, a mixed-use residential, retail, hotel and serviced apartment project that it is developing together with Hongkong Land.
In the first half, Shun Tak reported a 61% increase in core profit to HK$121 million from the same period last year. Including exceptional gains and revaluation gains, the net profit was up 1,910% to HK$1.69 billion.
The CB comes at a time when there is a lot of focus on the Macau gaming business, as Wynn Macau, the gaming operations controlled by Las Vegas casino magnate Stephen Wynn, will kick-off the formal institutional roadshow for its Hong Kong initial public offering today. The IPO, which comes just over a year after rival casino operator SJM Holdings listed in Hong Kong in August last year, is expected to raise about $1 billion.
Although Shun Tak isn't directly involved in the gaming business, it certainly has ties to it. The company owns an 11.5% effective interest in Sociedade de Turismo e Diversões de Macau (STDM), which is controlled by Macau gaming tycoon Stanley Ho. STDM owns 60% of SJM, which is the holding company of the largest casino operator in Macau. Stanley Ho is also executive chairman of Shun Tak.
According to the term sheet, Shun Tak plans to use the proceeds from the CB for general working capital and to finance new investment opportunities.
The latest CB to offer exposure to the Hong Kong property market before Shun Tak was the $600 million offering by Champion Reit in May 2008, which was part of a wider acquisition finance package that also included the sale of new equity and a bank loan. Half of that CB was bought by the Reit sponsor.