For the issuers, a CB provides cash without them having to relinquish much of their control or influence over the company - as they typically would have to if they had sold to private equity investors. Meanwhile, investors will get a guaranteed minimum rate of return on the bonds and at the same time will get to participate in the equity upside of the company before (and sometimes also after) the listing. Usually, the bonds will come with some form of guarantees or incentives to ensure that an initial public offering happens within a reasonable amount of time.
The latest such CB is somewhat unusual though in that it is being issued as part of the financing arranged to allow Aban Singapore, a provider of oil rigs to exploration and production companies, to buy out the 60% of a listed Norwegian associate that it doesnÆt already own. Aban Singapore is, in turn, 100% owned by Indian offshore drilling and wind power company Aban Offshore Limited. Stock in the Indian parent rallied 9% to a 52-week high yesterday on news of the successful acquisition before settling 7.9% higher on the day.
The total cost of the acquisition is $775 million, of which $150 million will come from the convertible bonds. The remaining $625 million will be made up of a combination of long- and short-term bank debt secured on the companyÆs oil rigs, leveraged finance and a small portion of internal cash. The loans are provided by Indian relationship banks.
The financing package has been arranged by Merrill Lynch.
The acquisition of Sinvest ASA got the green light at the end of last week after shareholders of the Norwegian company had tendered enough shares in response to Aban SingaporeÆs mandatory general offer to make the deal unconditional. As of last Friday, Aban Singapore controlled 97% of the shares in Sinvest, which is also in the business of providing oil rigs and services to the worldÆs oil majors.
The deal will allow Aban Singapore, which provides services to E&P giants like Shell and Reliance Petroleum, to boost its growth pace and give it a more global platform. It will also more than double its number of oil rigs by adding SinvestÆs eight û five of which are still under construction û to the seven it already owns.
Because SinvestÆs oil rigs are newer they are typically more advanced than Aban SingaporeÆs existing rigs and designed to meet the specific needs of different customers as oil exploration becomes more difficult. Many of the new rigs can drill as deep as 350 feet from the bottom of the seabed, which means they are suitable for use in deep sea water and also that they can command a higher monthly rent.
The CB has a high equity content, including a mandatory conversion feature if (or when) Aban Singapore becomes a publicly listed company. While there is no definitive date when this will happen, the company has agreed to seek a listing by the time its earnings reach a pre-specified, but undisclosed, level.
As the combined company will have new rigs coming on line over the next two years a significant earnings boost can be expected, however. The CB also has a series of put options that will kick in after 36 months, 45 months and 54 months, respectively, which will provide exit opportunities for the investors at an internal rate of return that will be a minimum of 20%.
Together, this suggests it would be logical to expect an IPO within the next three years, before the first of those options come into play.
According to sources familiar with the deal, the CB was bought by four specialist hedge fund-type investors, three of which are based in Asia and one from London. As is typical with this type of pre-IPO financing, where the investors get no actual control of the company, none of the buyers were disclosed, but the sources say all of them have had at least some previous investment experience within the sector. One of the investors bought almost half the deal, while the other three split the rest.
If the company is listed, the bonds will convert into equity that will give the four investors û none of which is linked to Merrill Lynch û 10.4% of the company, subject to standard adjustments for various dilutive events. Until then, they will receive an annual coupon that includes step-up as well as step-down features, but will average about 5.5%. The final maturity of the bonds is seven years and should they still be alive by then they will provide a total yield of 12% when redeemed. However, the structure of the CB makes it unlikely that the bonds havenÆt either been converted or put back before then.
To work out whether the investment is worth while, sources say the investors would have had to incorporate a view on where rig rents are heading over the next few years. While these are typically quite volatile, they have over the past couple of years been heading higher as crude oil prices have also been going up. Rents are not quite as volatile as actual oil prices, however, as rigs are typically rented out on two-three year contracts, although they can sometimes be as short as three to six months. At present, rigs with a drilling depth of 350 feet command rents of about $225,000 to $250,000 per day, compared with less than half that two years ago.
A key reason for the rise is that as the oil price has risen, the demand for exploration û and consequently more rigs - has increased too. At the same time more and more oil producers choose to rent the rigs and services from contractors, like Aban Singapore or Sinvest, rather than to own them themselves.
Meanwhile, the supply of new rigs is tight and is expected to remain so over the next two to three years, according to one observer, who notes that these rigs are manufactured at ship yards and most of these are already operating at full capacity for the next few years.
ôAs a result, one can expect rates to continue to move up in the next two to three years. After that they will become a function of the construction rate of new rigs,ö he says.
While some pre-IPO CBs are not made public until the company is actually ready to list, the currently available information suggests that this could be the first real pre-IPO CB by an Indian company. However, as its name indicates, Aban SingaporeÆs operations are based out of Singapore and it wouldnÆt be far-fetched to assume that the eventual listing would also take place in that market û or at least in a market which, like Singapore, serves as a hub for a variety of oil and gas companies.