This week Chinese wind power developer, Longyuan Power closed a $400m senior hybrid bond deal (a mixture of debt and equity where holders are given the option to convert the bond into equity after a specified time period). The money raised will go towards financing Longyuan’s aggressive expansion plans which, according to reports could see offshore capacity increase by five times over the next three years.
The issuance of this hybrid comes as a compromise in the wake of negative reactions from the market and minority shareholders at a proposed issuance of 1.35bn new share issuance earlier in the year. Although the issuance would have raised $1bn for the company, it would also have resulted in 18% equity dilution and was met by the market with an 11% reduction in the share price. The proposal was passed at the AGM (no surprise given the parent company Guodian Group’s 62% share ownership) but minority shareholders were unhappy and most voted against it.
In order to placate investors, Longyuan decided to raise money from a hybrid issue (although its right to issue shares is still valid until July) which was more positively received by investors. The deal size was increased from $300m to $400m due to overwhelming demand. Demand stemmed, in part, from the comfort provided to investors by issuing bonds as ‘keep-well deeds’ (a commitment from the parent company to provide finance and enhance creditworthiness) as well as from the attractive return offered by the deal compared to a plain vanilla bonds from Chinese SOE’s[3].
While private banks usually make up the majority of hybrid deals, this deal proved different with the largest chunk being taken up by funds (43%) followed by private banks (40%), sovereign funds (10%), insurance companies (3%) and banks (3%).
Hybrid deals are not common in Asia but this issuance contributes to a record breaking year for hybrid bond deals world-wide. Up to August 2012, $23bn of hybrid debt was issued which is a 71% increase on 2011 (the previous record year).
