One could argue that with Singapore-listed Wilmar having grown into an $18.7 billion market cap giant following three mergers in 12 months, the deal was of an appropriate size. However, the free-float of the stock is still quite small at less than 14%, which means the ability to hedge the equity option was ôless than perfectö to use the words of one observer.
On top of that, the bookrunners decided not to provide any credit bid, which opened a discussion on the appropriate level of the credit and created enough negative energy to push the price of the bonds below par in the grey market. Given that investors have become increasingly risk averse in recent weeks, this provided a real challenge, and after about seven hours of marketing, the bookrunners chose to re-offer the bonds below par to get sufficient momentum to complete the deal.
According to a source, investors reacted well to the re-offer at 99.00, and the five-year, zero-coupon CB ended up being oversubscribed, which allowed joint bookrunners CIMB, DBS and Goldman Sachs to allocate the issue to third party accounts in full. About 60 investors came into the book, some with what have been described as chunky orders. Some 60%-65% of the demand came from Asia and the rest from Europe.
Hedge funds accounted for a smaller-than-usual portion of demand, which reflects the fact that they are looking at reducing rather than adding to their exposure at the moment. Many of them have even closed up shop for 2007 to avoid getting themselves involved in a loss-making deal shortly before year end. Long-only asset managers still have cash to invest though, so they are still participating in new offers.
The bonds were priced with a conversion premium of 28% above the latest market price of S$4.20, which was at the generous end of the 28% to 35% range. The yield was offered in a range between 2.7% and 3.3% and fixed at 3.3%. Following the re-offer that yield will increase slightly, however.
The premium isnÆt that steep in relation to other Singapore CB issues. However, it will be added to a share price that has already doubled this year thanks to a re-rating following the recent mergers. Based on yesterdayÆs morning close of S$4.20, the share price is also trading only 13% below its all-time high of S$4.84 that was reached on November 15.
The bonds have a mandatory conversion feature at the option of the issuer, subject to a 130% hurdle. Investors can also put them back to the issuer after three years.
While the bookrunners provided no guidance, most investors were said to have used a credit spread between 170 and 220 basis points over Sibor for BBB-rated Wilmar. The stock borrow cost was assumed at 4% to account for the heavy demand for shares when the CB was launched. A day earlier, investors had reportedly been able to borrow limited number of Wilmar shares at 1%-1.5%. The bondholders will also get compensated if the dividend payout ratio exceeds 20%.
Based on the low end of the credit spread assumptions (170bp) the bond floor comes out at 93.2% and the implied volatility at 27.3%. At the high end (220bp), the bond floor falls to 91.9%, while the implied volatility increases to 29.5%. The historic volatility is in the 40s.
One source notes that the fact that Wilmar is a blue-chip, an investment-grade credit and the fourth largest stock on the Singapore stock exchange after Singapore Telecommunications, DBS and UOB, means that in theory investors should be very familiar with the company and therefore there ought to have been no need for a credit bid. However, having become a publicly traded company just over a year ago through a back-door listing, this may not have been the case.
And while equity investors have shown that they like the companyÆs integrated strategy, which spans the entire palm oil chain û plantations to various end products like cooking oil, fertilisers and bio-fuel û they may not yet have been that comfortable with the credit. In the end though, the company got its money and the bonds were neither downsized nor re-launched with adjusted terms. However, it seems highly unlikely that Wilmar will be able to exercise the $100 million upsize option.
Wilmar, which was founded in 1991, is part of MalaysiaÆs Kuok Group. It has operations in more than 20 countries with a particular focus on Indonesia, Malaysia, China, India and Europe. Earlier this year it merged its existing operations with the Kuok GroupÆs palm plantation, edible oils and grains businesses and also acquired similar businesses from its parent company Wilmar Holdings.
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