Hong Kong: placings, the general mandate and why a floating strike consumes it at its floor

Hong Kong permits a convertible with reset provisions but not one that floats freely at a real discount. A convertible issued under a general mandate must have an initial conversion price clearing the Rule 13.36(5) benchmarked price, and Guidance Letter GL80-15 makes the issuer count its conversion shares at the lowest possible conversion price, so a floating strike consumes the mandate at its floor from day one.

Key takeaways

• The general mandate is 20%. Measured against the shares in issue when shareholders approved it, and consumed by everything issued under it that year. Beyond it, a specific mandate and a circular are required.
• The 20% discount limit uses the higher of two prices. The benchmarked price is the higher of the closing price on the date of the placing agreement and the 5-day average closing price before the earliest of announcement, agreement and price fixing.
• GL80-15 prices the optionality in capacity. Where the issuer does not control post-issue adjustments, the maximum conversion shares are computed at the lowest possible conversion price — the deeper the reset, the more mandate it burns before converting anything.
• Highly dilutive issues are capped. Since July 2018 rights issues, open offers and specific mandate placings causing 25% or more cumulative value dilution over a rolling 12 months have been disallowed absent exceptional circumstances.
• Connected persons change the process. A placing to a substantial shareholder or a director is a connected transaction under Chapter 14A and normally needs independent shareholder approval.

The general mandate, and what it really allows

Hong Kong is a mandate market. At each annual general meeting shareholders authorise the directors to allot up to 20% of the shares then in issue, and that is the capacity for the year: a placing in March reduces what is available in October, and a convertible consumes capacity for the shares into which it converts. Rule 13.36(7), added in 2018, also bars a general mandate being used to place warrants for cash, closing the route by which cheap optionality escaped the discount limit.

Why the discount limit shapes the instrument

An issuer may not issue securities under a general mandate at a discount of 20% or more to the benchmarked price. For a share placing that sets the floor. For a convertible it does more: the test applies to the price at which shares would be issued, so the initial conversion price must clear it.

GL80-15: the reset is priced in capacity, not in cash

The rule that actually decides a convertible here is not a pricing rule at all. Guidance Letter GL80-15 separates convertible securities into two kinds. A conventional convertible may be issued under a general mandate if the issuer has enough unused mandate to cover full conversion measured at the time of issue. A convertible carrying automatic price adjustments the issuer does not control is treated differently: the maximum conversion shares must be calculated using the lowest possible conversion price.

Read that against a 20% mandate and the arithmetic does the work. A strike that can reset down to half the initial price consumes twice the headroom of a fixed-price convertible of the same face value, and consumes it on the day of issue. The optionality is not free and is not paid for in coupon; it is paid for in the issuer's remaining capacity for the year. That is quieter than a prohibition and, for a small issuer with one mandate to spend, more effective.

What works instead is a fixed conversion price with a capped, floored reset, or a series of tranches each priced against the benchmark on its own date. See dilution and conversion mechanics, and death spiral financing for the failure mode a floorless structure produces.

A drawdown facility here is a series of placings

Hong Kong has no concept of a committed equity line drawn at a floating discount. The nearest construction is a sequence of discrete placings, each fitting the remaining mandate, respecting the 20% maximum discount on its own date, and counted against the cumulative dilution restrictions. There is also a local mechanic for speed, the top-up placement (先舊後新配售): a substantial shareholder places existing shares and then subscribes for the same number of new shares at the same price, delivering settled stock to the market immediately and cash to the company shortly after.

None of that is a facility in the sense used on the equity facilities sub-hub. It is a programme of separately announced transactions with an investor who has agreed in advance to be there — different to document and different to price.

The 2018 restrictions on highly dilutive issues

Rule 7.27B, effective 3 July 2018, disallows a rights issue, open offer or specific mandate placing causing a material value dilution of 25% or more, measured cumulatively over a rolling 12-month period, unless there are exceptional circumstances. The measure combines the number of new shares with the discount at which they are issued, so several individually reasonable raises can aggregate into a breach. The 12-month history matters as much as the current deal.

Main Board and GEM

Connected persons and the specific mandate route

If the incoming investor is already a substantial shareholder, a director, or an associate of either, the placing is a connected transaction and Chapter 14A applies: an independent board committee, an independent financial adviser, a circular and a shareholder vote with the connected person abstaining. That is the most common reason a Hong Kong placing takes eight weeks rather than eight hours. An unconnected subscriber inside the mandate and the discount limit documents quickly, which is why the placee analysis belongs at the start. See how a listed-issuer placement is documented, and check the eligibility test.

Related reading

• All markets
• Japan
• Malaysia
• Australia
• All instruments

Primary sources

• HKEX Main Board Listing Rules — Rule 13.36 (general mandate and the discount limit)
• HKEX Guidance Letter GL80-15 — issues of convertible securities by listed issuers
• HKEX Listing Rules and Guidance — rulebook
• Securities and Futures Commission

Financing a Hong Kong issuer: frequently asked questions

How much can a Hong Kong issuer place under a general mandate?

Up to 20% of the shares in issue at the date shareholders approved the mandate. It is normally renewed at each annual general meeting, and anything already issued under it during the year reduces the headroom. To go beyond 20% the issuer needs a specific mandate approved by shareholders for the particular transaction.

What is the benchmarked price under Rule 13.36(5)?

It is the higher of two figures: the closing price on the date of the placing agreement, and the average closing price over the 5 trading days immediately before the earliest of the announcement, the agreement, and the date the price is fixed. Because the rule takes the higher, a falling share price does not lower the floor, which is the point most often missed when a deal is negotiated during a decline.

Can a Hong Kong issuer use a floating conversion price?

Not in the form used in North America. The initial conversion price of a convertible issued under a general mandate is tested against the benchmarked price, and Guidance Letter GL80-15 requires the maximum conversion shares to be counted at the lowest possible conversion price where the issuer does not control the adjustment. A deep reset therefore burns mandate capacity on day one. Convertibles here are normally fixed price with limited, capped resets negotiated up front.

Can a Hong Kong issuer run a standby or committed equity facility?

Not as a single committed line. There is no HKEX concept of an equity facility drawn down at a floating discount, so it has to be rebuilt as a series of discrete placings, each fitting the remaining general mandate, each respecting the 20% maximum discount on its own date, and each counted against the cumulative dilution restrictions. Local practice reaches for the top-up placement when speed matters.

What are the restrictions on highly dilutive issues?

Since July 2018 the Listing Rules have disallowed rights issues, open offers and specific mandate placings resulting in a cumulative material value dilution of 25% or more over a rolling 12 month period, unless there are exceptional circumstances. Dilution is measured by the number of new shares and the discount at which they are issued, aggregated across the period, so a series of individually modest raises can breach the limit together.