A $310 million convertible for IOI Corp was completed on Tuesday night. It brings the total number of outstanding Malaysian equity-linked deals to seven, adding welcome diversity away from troika of Taiwan, Hong Kong and India.
Under the lead management of Ammerchant Bank and UBS, the transaction was priced at the wide end of the range. However, market participants deemed the valuation fair, although some levelled accusations of bait and switch tactics - an oft-heard complaint in the highly competitive Asian CB market.
Terms comprised a five-year final maturity, issue price of par, zero coupon and redemption price of 104.46% to yield 0.875%. There is a three-year call in October 2007 with a 130% hurdle and a 23 month put in August 2006 at a price of 101.69%.
The conversion premium was marketed against a five-day VWAP of 24% to 29% and priced at a 24% premium to a VWAP of M$8.92. There is also a $35 million option to upsize the deal.
Bankers believe the terms were vindicated by first day trading, with the issue closing Asian trading marginally up at 100.05% - 100.2%.
At launch, underlying assumptions comprised a bond floor of 93.9%, implied volatility of 30.3% and theoretical value of 100.5%. This was based on a credit spread of 120bp over Libor, zero stock borrow and a 260 day volatility assumption of 32%.
The dividend yield was calculated at 2% to 2.5% based on a maximum pay-out ratio of 50% of net income. In terms of the credit, the group has a domestic rating of Aa3 equating to an international rating of BBB to BBB-. Bankers estimate that less than 25% of the deal was stripped in the primary market, with most accounts taking a positive view of potential spread tightening.
The order book is said to have been fairly top heavy with the largest accounts adopting a binary approach. "Of the top 20 CB accounts, about half said they would participate in size because they liked the name," says one. "The other half declined because they thought that while pricing was fair, upside was limited."
Books are said to have closed about two times covered with participation by roughly 75 accounts.
Year-to-date, IOI Corp has been a strong performer, rising 18.18% compared to a roughly 2.5% increase by the KLCI. With a market cap of $2.7 billion, it accounts for about 2.5% of the index. Pre-conversion it had a freefloat of 62% and trades about $4 million a day.
Recent stock outperformance has been fuelled by rising crude palm oil prices (CPO) and strong first half results across the company's three main business lines - palm oil, property and refining. Operating profit for the 1H04 hit a record M$1.1 billion, up 37% on the previous year.
The company has since announced its intention to increase palm oil production by a further 12% over the next year in order to meet growing demand. Malaysia currently has a 15.5% market share of the world vegetable oil market and IOI accounts for about 6% domestic production volume.
Proceeds are being used to re-pay debt and fund expansion. In 2002, IOI acquired Netherlands-based refinery Loders Crocklaan and last month agreed to purchase Soctek, which has a refinery in the Malaysian state of Johor.
Critics main issue with the deal derives from allegations that UBS won it on the basis of promising a three-year put with a yield of below 1%. Rival bankers say this was never feasible, with the steepness of the yield curve between two and three years necessitating a 1.6% to 1.7% yield.
Company bankers, on the other hand, say IOI was always willing to consider a two-year put in return for a fairly high conversion premium. The conclude that shareholders gave their approval for a sub 1% yield and a conversion premium of 25% to 30% over a base price of M$8, both of which were achieved.
