Dollars and Jens
Thursday, March 09, 2006
regulations make strange financial instruments
Techpacific Capital has sold a $75 million five-year convertible bond to Goldman Sachs in order to raise money partly for an investment into three gas fields in the United States.Of course, most exotic characteristics of odd financial instruments are designed to suit the risk desires of the counterparties:
...Goldman Sachs will pay $72.75 million for the bonds after subtracting a $2.25 million discount, which Techpacific said was comparable to the fee it would have had to pay had the bonds been sold to a wider group of investors with the help of an independent investment bank.
The bonds can be converted into new Techpacific shares at a conversion price of HK$0.7665 per share, which represents a 2.2% premium to the March 3 closing price (the last trading day before the shares were suspended) or 5% premium to the average closing price in the previous five days. However, the CB holder has the option to exchange the bonds for shares in Crosby instead, at a price of £0.9975 per share, which equals a discount of 1.48% to the March 3 close and a 5.95% premium to the average close in the previous five days.
This unusual conversion structure is due to the fact that a full conversion of the bonds into Techpacific shares would have exceeded 20% of the company’s existing share capita. Under Hong Kong regulations this is the maximum it is allowed to issue. At the current conversion price, about 80% of the bond issue can be converted into Techpacific shares.
Meanwhile, Techpacific only has the right to deliver 33.5 million Crosby shares to CB holders who wish to exchange the bonds into the London-listed subsidiary, but will ask its shareholders for approval to hand over a further 9.44 million shares to cover a full exchange into Crosby shares. If this request is not granted, CB holders will have to convert into a combination of Techpacific and Crosby shares.
There is an issuer call after two years, subject to a 130% trigger, that could help force an early conversion.I obviously know nothing about this except through the media.
...The conversion price on the bonds will be reset if Techpacific’s shares close below HK$0.73, or Crosby’s shares finish below GBP0.95 the day after Crosby’s 2005 results (scheduled for March 16) and Crosby’s revenues failed to reach $120 million. The same would apply if the pre-tax profit is less than $95.32 million or the earnings per share fall below $0.385. The new conversion/exchange price will then be reset at 105% of the volume weighted average price in the first three days after the results announcement.