The transaction comes only four months after the company sold S$425 million worth of five-year CBs that are already deeply in the money. It also coincided with yesterdayÆs high-profile groundbreaking ceremony for the new Singapore resort û to be called Resorts World at Sentosa û which created a lot of hype among retail investors in particular.
The ceremony was held as the Singapore government said it was no longer concerned about GentingÆs business integrity after the casino operator severed its direct links with Macau casino magnate Stanley Ho, effectively giving the company the go ahead on the Singapore resort. The news sent GentingÆs share price 14.8% higher on the day.
As a direct result of that, the bookrunnes chose to fix the conversion premium over yesterdayÆs volume-weighted average price of S$0.9906, which marked a 5.7% discount to the actual closing price of S$1.05. Whether that actually had any impact is hard to tell given the current strong appetite for convertibles, but Genting became the second company in one night to price an equity-linked issue at the most aggressive end of the indicative ranges.
Earlier in the evening, China Overseas Holdings had priced a $500 million exchangeable bond with a record 50% premium and a 3.8% yield. The bonds are exchangeable into shares of its listed property subsidiary China Overseas Land & Investment (COLI).
Like on the China Overseas issue, orders for Genting were capped at 10% of the deal to ensure investors didnÆt inflate their requests. Even so, the issue was said to have been multiple times covered with more than 100 names in the book.
According to sources, Genting fixed the conversion premium at the wide end of a 20% to 25% range for an initial conversion price of S$1.2383. The yield was set at the bottom of the 1.9% to 2.59% range, which was a full 1.1 percentage points below the 3% achieved on the previous CB in December.
One source says 25 basis points of that could be directly attributed to an improvement of the Singapore dollar yield curve, while the remainder was a function of the market. Given that most of the other terms remained virtually the same compared with the December issue this gap makes the pricing seem more aggressive this time around. The conversion premium also widened by 2.5 percentage points from 22.5%.
Still, the 104% surge in the share price since the previous issue suggests investors are clearly positive on the future of this company. And that is despite the fact that the $3.4 billion Singapore resort project wonÆt become operational until early 2010.
The Singapore casino resort is expected to transform Genting into an international gaming play that has the potential of becoming a legitimate competitor to US casino operators. (Genting International also operates casinos in Malaysia, Australia and the UK.)
In a report issued earlier this month, Macquarie SecuritiesÆ Edward Ong, said he is ôhighly positiveö on the project which he believes will account for more than 80% of GentingÆs earnings before interest and tax once it is full opened by 2011.
ôWe believe that Sentosa will be a runaway success because of various factors, including a wealthy domestic population and a large hinterland, competitive tax rates (which are important in attracting VIP players), strong attractions, complementary attractions and world-class infrastructure,ö the analyst said in the report which initiated coverage on Genting.
Arguing that investors should disregard the fact that the stock will look expensive on a price-earnings or EV/Ebitda multiple basis until it starts to receive earnings from the new project, he slapped a S$1.57 target price (based on discounted cash flow) on the stock. The hefty upside suggested by that price caused the stock to rally more than 12% on the day the report became known to the wider market.
Genting offered S$375 million worth of convertibles with a S$75 million upsize option that was exercised shortly after the terms had been finalised. Accounting for about 7% of the current market capitalisation, the bonds have a five-year maturity with no put and will pay no coupon.
The company is clearly focused on seeing the bonds converted to equity as they have an issuer option to call for a mandatory conversion after two years, subject to a 120% hurdle. Contrary to a normal call option, this means investors wonÆt get a one to two month period during which to decide whether to convert or to redeem, but rather have to convert into equity straight away.
Should the share price fail to perform, the conversion price can also be reset after three years, down to a floor of S$0.9906, which is equal to MondayÆs VWAP.
The underlying assumptions include a credit spread of 185 basis points over Singapore dollar swaps, a 5% stock borrow cost and full dividend protection for the first three years and above a 1% dividend yield for years four and five. These terms were all identical to the December issue.
Given the lower yield and slightly higher premium, however, the bond floor came down slightly to 86% from just over 89% on the previous deal, while the implied volatility was largely unchanged at 30%. One source notes that while the other terms suggest that the implied vol should be higher this time around, people involved in the deal felt that it had been too high on the December issue and based on their calculations the 30% levels was indeed appropriate for the terms used on the current deal.
The source says Genting chose to do another CB so soon after the previous one because it believes there is still ôa lot of upsideö left in the stock. And since about half of the previous CB has already been converted û the share price is currently trading 67% above the conversion price û the company had more capacity to issue debt.
ôThe company also wants to preserve its cash flow so a zero-coupon CB is the perfect instrument,ö the source adds.
YesterdayÆs CB was jointly issued by CIMB, DBS and JPMorgan with Macquarie Bank and OCBC Bank acting as co-lead managers. Among these banks, only DBS was involved in the first issue as well, which was completed at the same time as a M$1.04 billion ($297 million) share placement by GentingÆs Malaysia-based parent company Genting Bhd. Aside from DBS, Merrill Lynch and HSBC were also involved in the first CB.
Among the recent positive buzz surrounding Genting is the announcement that it will buy out Star CruisesÆ 25% stake from the company that obtained the Singapore casino license to become the sole owner of the World Resorts at Sentosa project. In return, Genting will sell its stake in a casino project in Macau to Star Cruises to appease the concerns raised by the Singapore government. The Macau project was to have been a joint development between the Genting International and Stanley Ho, but will now be undertaken by Ho and Star Cruises instead. Star Cruises is also part of the Malaysia-based Genting Bhd group.
Genting International is forecasting that Resorts World at Sentosa, which will include six hotels with a total of 1,800 rooms, will see 15 million visitors in its first year of operation in 2010 and generate additional spending of S$10 billion. By 2015 the resort is expected to bring in tourism receipts of S$15 billion ($9.7 billion), accounting for half the target set by the Singapore Tourism Board for that year, according to an earlier company statement.
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