The new bonds will be similar to the existing bonds except that the new bonds will repay 100% of the principal at maturity in June 2012 and will not allow bondholders to force the company to redeem by June 2010, but in return, the company will pay an annual interest of 5% (paid semi-annually). As well, the old conversion price of S$4.455 will be reset to the equivalent to the average price from 17 Aug ’09 to the trading day prior to the closing date and there is no restriction on the convertibility of the new bonds.
An EGM is expected to be held on 2 Oct ’09 for shareholders to vote and at least 75% of positive votes are required to put the deal through.
The new deal sounds like a good deal for existing CB holders as they would be able to gain 5% annual interest as well as lower conversion price. The only downside is that if business at Delong remains in the doldrums, the CB holders would only be able to get the 5% annual interest and not be able to participate in the rise in share price and remain stuck with their CB until June 2012. However, this sounds like a better deal than see the company go into receivership for not being able to meet their debt obligations.
While Delong has underperformed most other SChips by rising the least from its low (shown in our table yesterday) we maintain that at 1.8x price to book it remains overvalued compared to China’s largest steel producer (Baoshan) which trades at 1.4x and the industry remains in the bad books of the government given overcapacity & pollution problems, hence maintain SELL.
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