The bonds, which are placed with six investors, have a five-year maturity and pay a coupon of 8.5%. They carry a low conversion premium of 7.9% to HK$5.20 (US$0.67) based on the closing price of HK$4.82 on April 23. They can be put back to the issuer at par after three years.

 

In addition to the conversion option, the deal included detachable warrants on the basis of one warrant for every four shares held. They can be exercised at HK$5.10 per share, representing a 5.8% premium to the last closing price. Both the bonds and the warrants have a non-conversion period of 18 months.

 

Net proceeds from the bonds will be used for the repayment of existing debt and for general working capital purposes. Upon exercise in full of the warrants, about HK$285 million will be further raised for Techtronic and also applied for the repayment of existing debt and general working capital.

 

The first tranche of the CBs amounts to US$74.1 million and accounts for 7.4% of the existing share capital, while the second tranche totals US$50.9 million or 5.1% of the current share capital, plus an upsize option of US$25 million.

 

In choosing the private placement route, Techtronic was able to complete its fund raising faster and avoided market risks. “It is expected that this deal will be compared with the CB launched by Beijing Enterprises and any other public deals that have been brought into the market,” a banker familiar with the transaction points out. “But the profile of this issuer is very different from them in terms of market capitalization and in terms of credit, so they need to be taken into consideration.”

 

In setting a low conversion premium, the banker notes that Techtronic shares had a strong run up two week before the transaction, rising by almost 30%. “So the issuer was happy with the absolute conversion price.”

 

Investors, though, initially were not pleased with the placement, pushing the stock price down by 18.5% to HK$3.93 on April 24, but it eventually recovered. “There were speculations that the drop was due to shorting, but that was not the case,” the banker says. “The shorting was just a small fraction of the number of shares that were traded following the closing of the transaction. Investors might have misunderstood what the CB represented and the existing shareholders might have dilution concerns.”

 

The launch of the deal in two tranches was due to the fact that the company has a general mandate to issue just up to 10% worth of new equity this year. It will seek another general mandate at the shareholders’ meeting at the end of May 2009 to be able to launch the second tranche, which will be have similar terms with the first tranche. “This is just a way for the arrangers to put together a bigger deal,” the banker says.

 

Merrill Lynch, HSBC and Citi acted as the joint placing agents for the transaction.