SHARES of mainboard-listed Nio : NIO -11.11%plummeted to a 90-day low on Wednesday (Sep 20) after it announced the pricing of a two-tranche convertible bond, from which it plans to use the US$1 billion proceeds to pare debt and strengthen its balance sheet.

 

The counter hit a low of US$8.75, down 11.6 per cent or US$1.15 as at 2.24 pm. The last time it closed near this level was on Jun 23, 2023.

 

It later recovered slightly to close at US$8.80 on Wednesday, down 11.1 per cent or US$1.10, after 316,080 shares worth US$2.8 million changed hands.

 

The Chinese electric vehicle (EV) maker raised US$500 million in six-year convertible notes at an interest rate of 3.875 per cent, and the same amount in seven-year notes at a 4.625 per cent interest rate.

 

Both notes are senior and unsecured, and have an initial conversion rate of 89.9685 American Depositary Shares (ADSs) per US$1,000 principal amount. It is equivalent to an initial conversion price of about US$11.12 per ADS, and represents an initial conversion premium of around 30 per cent above the ADS closing price of US$8.55 on Sep 19, 2023.

 

DBS Group Research noted in a report on the same day that the fundraising came two months after Nio raised US$738.5 million from Abu Dhabi government-backed firm CYVN Investments RSC through a share placement.

 

Nio&rsquo s total debts stood at 14 billion yuan (S$2.7 billion or US$2 billion) as at the end of June. This includes four billion yuan, or 28.6 per cent of the total debts, of its 2026 convertible notes, which will be due for redemption in February next year.

 

The total notes redeemable in 2024 thus is close to US$700 million, DBS highlighted.

 

Nio said that it will use part of the offering&rsquo s net proceeds to buy and cancel about US$500 million of existing convertible debt. That comprises US$256 million of Nio&rsquo s zero-coupon convertible notes due 2026, and US$244 million of the company&rsquo s 0.5 per cent convertibles due 2027. Remaining proceeds will be used to &ldquo strengthen its balance sheet position&rdquo and for general corporate purposes.

 

&ldquo The company has to prepare sufficient funds to support future growth, given it is still in the early stage of development,&rdquo said DBS.

 

The company incurred non-generally accepted accounting principles net losses of 12 billion yuan for FY2022 and of 9.6 billion yuan for the first half of 2023, which had dragged on its financial position.

 

While Nio could face some near-term share price pressure, DBS is expecting an improving business prospect supported by stronger vehicle sales, and keeping its &ldquo buy&rdquo call for the company.

 

&ldquo Monthly vehicle shipment is expected to increase from about 9,000 units in H1 2023 to 18,000 to 19,000 units in Q3, and about 30,000 units per month by Q4, supported by the ramp-up of its new models.&rdquo

 

The EV maker&rsquo s operating cash flow could be further strengthened by a scheduled launch of a mid-market brand Alps in H2 next year, in addition to broader participation along the EV value chain, such as the potential collaboration with Svolt on battery development.

 

Nio&rsquo s latest bond deal also pushed the equity-linked debt issuance market by Asian companies to the busiest since March 2022, signalling a booming appetite for the hybrid instruments, reported Bloomberg.

 

In a volatile economic environment with interest-rate hikes, equity-linked bonds attract investors with their lower coupons and the profit potential from a rise in underlying share prices. They also benefit companies as an alternative financing tool for conventional stock financing.

 

The total proceeds raised via convertible bonds by Asia&rsquo s borrowers reached US$12.8 billion, the highest since the first quarter last year.

 

Among the Asian companies, Nio&rsquo s offering is the biggest since South Korea&rsquo s LG Chem&rsquo s US$2 billion deal in July, according to Bloomberg.

 

In Nio&rsquo s US$1 billion offering, the placement agents have a 30-day option to purchase an additional US$75 million of notes for each series.

 

The company may call the notes for early redemption after four years in the case of the 2029 notes, and after five years for the 2030 notes. Convertible holders may put the notes back to the company for early redemption in 2027 for the six-year notes, and in 2028 for the seven-year notes.

 

The EV maker expects to close the notes offering and the repurchase transactions on or about Sep 22, 2023.

 

It cautioned that the convertible holders are expected to employ a convertible arbitrage strategy. Convertible arbitrage typically involves taking short positions on the convertible&rsquo s underlying stock.