Eratat seals Dim Sum ABS
IFR Asia 805 - July 20, 2013 | By Nethelie Wong
Eratat Lifestyle has completed a Rmb134m (US$22m) securitisation in the first private placement of asset-backed securities in the offshore renminbi market.
The company placed Rmb134m of 12.5% bonds with 82.5m warrants to SWAT Securitisation Fund, a SPV of Sun Hung Kai Financial. SWAT, in turn, offered a Rmb106.8m senior tranche of ABS to investors and a Rmb27.2m junior tranche to Sun Hung Kai Financial.
The Singapore-listed apparel-maker is paying an annual coupon of 12.5% on the two-year bond, issued at 74.44. That translated to a hefty yield of over 30%, leaving plenty of room for a securitisation transaction.
However, the interest rates on both the senior and the junior ABS tranches were not disclosed. The exercise price is S$0.25 for each warrant , which represents an 85% premium to July 15’s share closing of S$0.135.
Proceeds will be for expansion. Eratat’s gross profit ratio was at around 18.4% for 2012.
Rival bankers saw the deal as a high-yield structured product rather than a proper ABS as the bankruptcy-remote and the relatively low interest rate features are not significant in this case.
The bond has a charge over 121,525,000 shares in the company directly and indirectly in the hands of Lin Jiancheng, the company’s CEO. The shares represent approximately 25.59% of the existing issued share capital of the company.
The transaction was the combined result of the sudden liquidity squeeze in the onshore market in late June/early July and a reverse enquiry from high-yield investors chasing yields.
The reason the warrants were bundled into the bonds was that the company’s share price had hovered at lows recently and it would have been very unfavourable to existing shareholders if convertible bonds had been issued instead.
As for the use of the ABS structure, it was to boost the confidence of investors in buying into the deal as Sun Hung Kai Financial is retaining around 20% of the transaction as a junior tranche. Sun Hung Kai Financial acted as arranger, as well as co-investor, on this transaction.
1. The 2Q results (& 1 H) are so-so. No growth for 2Q, hardly any for 1H.
Take away the RMB20.9 million amortisation for renovation incurred in 1Q2012 and you get a flattish profit for 1H2013. There should have been a RMB20.9 m saving also on renovation subsidy for 2Q2013 but .... surprise! they spent more money on advertising. This resulted in 2Q profit being lower than 2Q12.
Strange that they spent an extra RMB6.9 million on advert, yet the profit dropped. It's not as though they spent more than the reno subsidy (that didn' recur)
2. The cash level is lower than 1Q13, but that's expected due to the deposits paid to OEM manufacturers for its apparel.
cash at RMB502.1 million (FY12H1: RMB281.7 million), representing about RMB1.06 per share (or S$0.21 per share).
- guys, Dont just look at the net profits after tax n then conclude. Look at other numbers behind the scene.
- Sales n net profits for Q2 are in line with expectations. The net profit for combined 1st half is up over 50% , which is RMB20+ mil more. For 1st half order composition, Q1 make up more orders over Q2 but overall more apoarels are sold in 1st half over prev 1st half so the growth of the core biz is there. I will say its more like a shift of orders from Q2 to Q1 so the small dip in Q2 profit is not really a big deal.
- This year is the consolidation year and with roughly the same retail stores, revenue is projected to be flat but net profit should increase as there is no renovation subsidy. For Q2, I won't say it is a disappointment, neither is there any surprise. The real growth will come next year when more stores open. Now is like preparation phase be4 the major expansion.
- Did anyone notice a sudden RMB57.9 mil more surge in trade deposits? If my conjecture is correct, tat could project a good growth in orders for q3 and q4. New distributors could be announced in q3.
- Trade receivables has dropped to a manageable healthy level. Reducing q2 orders paves the path for later q3 n q4 orders.
-Viva, it will take some time for advertising to take effect to boost the sales. Tat could explain the surge in trade payables. Note that book orders are made a couple of months back so any advertising made in Q2 will only get to see its effects in Q3/Q4.
- my estimate for its Full year net profit after tax will be to rise from RMB140mil to around RMB160mil minimum - RMB180 mil roughly, assuming net profits in Q3 and Q4 stay roughly the same as last year.
- Gd to have Julian So on board as non executive director. That will strengthen the corporate governance and improve transparency. It is also good that SHK is holding onto a certain % of the bonds.
- Over at valuebuddies, Boon highlighted about the Asset Light Distribution model and mention that its pros is that it is highly scalable model and its flaws is that overexpansion leads to overcapacity, which is a real issue faced by sports apparel industry. If u look at Eratat, they do not go for aggressive growth but they try to expand steadily bit by bit each year. Eratat are focusing on quality distributors over quantity distributors to ensure expansion is sustainable. I think Eratat has taken sufficient business steps to ensure demand and supply of apparel matches well and not to repeat the same overcapacity mistakes made by the sports apparel industry.
- Will find out more from the CFO during the q2 briefing tmr morning.
NextInsight
a hub for serious investors
