CapitaLand, a Singapore-listed real estate developer, took advantage of the positive market response to the US Federal Reserve’s decision last week to keep its bond-buying programme unchanged, selling S$750 million ($596 million) worth of convertible bonds.
The deal, which launched and priced on Thursday last week, came just four months after the company raised S$650 million from another CB issue. Investors did not seem to mind that the company was returning to the market this soon, however. This was partly because there has not been much new CB issuance this year and investors are happy to see new supply, artly because, like CapitaLand’s previous transaction, the deal was accompanied by a tender offer for some of its outstanding CBs.
According to a source, the intention is to match the size of the new issue and the amount of bonds it will buy back through the tender, rather than to increase the amount of outstanding bonds and raise new capital. The tender offer includes two bonds maturing in 2016 and one bond maturing in 2018. It opened on Friday last week and will close on October 10.
As one of the top-quality CB issuers in Asia – it is the largest real estate developer in Singapore and has a strong credit profile – CapitaLand is also one of those names that all serious CB investors have to own. And the possibility of switching into a new issue with a higher option value did attract some of its current CB holders. The source estimated that about 30%-35% of the buyers of last week’s transaction would likely also tender some of their existing bonds, suggesting that the accompanying tender did help add to the demand.
In all, the base deal was said to be about two times covered and the book was said to include some pretty big orders, even though the terms were quite aggressive. For one, CapitaLand once again chose a maturity that was significantly longer than the market average – this time a 10-year with a five-year put option.
The CB it issued in May had a seven-year maturity with no put, and in the past the company has sold convertible bonds with even longer maturities. In 2006 it issued a 10-year CB with a seven-year put and in 2007 it entered the record books with a 15-year deal that came with a first put option at the end of year 10 and a second one at the end of year 12, giving it an effective 10-year maturity.
Taking full advantage of the demand, CapitaLand chose to upsize the deal by a greater-than-indicated S$150 million for a total deal size of S$750 million. It was initially launched with a base size of S$600 million and an upsize option of S$100 million.
Meanwhile, it was able to fix the conversion premium above the bottom of the indicated range of 28% to 33%. The final premium was set at 30% over the latest market price of S$3.24 for an initial conversion price of S$4.212, a level that the stock has not traded at since January 2010.
The coupon and yield were, however, fixed at best terms for investors – at 1.95%. They were marketed in a range of 1.45%-1.95%.
At a marketed credit spread of 150bp, an assumed stock borrow cost of 50bp, dividend protection for payouts exceeding a fixed amount each year, and an estimated stock slide of 3%, the terms resulted in an implied volatility of 18.9%. The source said this was in line with the historic volatility, with the 30-day, 100-day and 260-day volatility gauges all between 19% and 21%.
That is quite aggressive, particularly at this large size. Indeed, the CB was quoted slightly below par in the grey market during the bookbuilding. However, it opened at 100.25 to 100.625 on Friday and traded up to about 101 during the session, sources said. The share price fell by a less-than-expected 2.5% to S$3.16, although volumes were fairly thin because markets in Hong Kong, China and South Korea were all closed to celebrate the mid-autumn festival.
CapitaLand’s share price has had a difficult time this year and as of last Friday it was down 21.6% from its 2013 high of S$4.03, which it hit in late January. Also, it was trading only 7.8% above its late August low of S$2.93.
Bankers said the holiday on Friday was one reason why there were not more equity deals in the market on Thursday, despite pretty big gains across Asian equity markets after the Fed surprised forecasters by deciding not to start tapering just yet. Hong Kong gained 1.7% and Singapore was up 1.9%, while India’s Bombay Sensex index added 3.3% and Indonesia jumped 4.7%.
However, doing a deal – a block trade in particular – the day before a holiday is always difficult as it increases the market risk for investors that buy into the transaction. Because of that they either stay away altogether or ask for a bigger discount to compensate for the higher risk.
CapitaLand did not have to deal with that as Singapore was open as normal on Friday. To make sure it did not miss any Hong Kong-based investors before they headed home for the long-weekend, the company suspended the stock at 12:50pm on Thursday and launched the deal about 30 minutes after that. The order book was kept open until about 8pm that same evening.
The source said the demand was pretty evenly split between Asia and Europe, with some participation from the US as well. Outright investors accounted for about 70%, while the rest of the demand came from hedge funds. This was perhaps a bit surprising since there is plenty of stock borrow available, making it easy and relatively cheap for hedge funds to hedge the equity option.
That said, CapitaLand does have a strong following among some key long-only investors. The bond floor was also not too demanding at 95.1%.
In all, the deal attracted close to 50 investors, which was slightly fewer than in May when more than 60 accounts came into the transaction.
The tender offer
Part of the reason why CapitaLand is so keen to buy back its outstanding CBs is that it has several deals maturing or becoming puttable in a relatively concentrated period between 2015 and 2018. The latest two deals, in May and last week, have been designed to extend its maturity curve, while at the same time raising capital to allow it to stagger the payments needed to cover the maturing bonds, thus easing the pressure on its balance sheet.
The company invited investors to tender the following CBs:
- The 2.1% CB due 2016, which was issued in November 2006 at a size of S$430 million and will have S$184.75 million left outstanding after taking into account the amount of bonds that will be redeemed in November as a result of a put option. The minimum tender price will be 97% of the principal amount and the maximum price will be announced by the company on September 30.
- The 2.875% CB that is also due in 2016. It was issued in September 2009 at a size of S$1.2 billion and has S$971 million left outstanding. Investors can tender the bonds at a price between 102% and 106%.
- The 3.125% CB due in 2018, which was issued in March 2008 and becomes puttable in 2015. It had an initial size of S$1.3 billion and S$557.5 million left outstanding. Investors can tender the bonds at a price between 108% and 111.5%.
The tender will be done through a modified Dutch auction, with CapitaLand determining a single purchase price for each bond. The final amount of bonds that it will buy back will depend on the amount tendered and the price, but the total will not exceed the S$750 million raised from the new bond, the company said.
The tender price ranges are not overly generous as they basically straddle the market prices of the three CBs. In other words, CapitaLand is not providing much incentive for existing CB holders to tender. In a way that is odd as it obviously would not launch two tender exercises this close to one another if it did not want investors to take it up on its offer. However, the company clearly does not want to – or feel that it has to – pay over the top to buy back the bonds.
In its previous tender, which was completed in mid-June, it bought back S$432.5 million worth of the same 2018 CB that is part of this latest offer. The company received valid tenders totalling almost S$620 million and fixed the repurchase price at 111.5% versus an earlier announced maximum price of 112%. That was about 1 point above the market price at the time, translating into a modest 20bp premium per year based on the five years that remained until maturity.
Credit Suisse was the sole bookrunner for the CB and is also acting as the sole dealer manager for the tender offer. The Swiss bank also arranged the previous tender and was a joint bookrunner for the May CB together with Bank of America Merrill Lynch.
