Another record-breaking CB from CapitaLand

The Singapore developer raises S$1 billion from the CB, which has an effective 10-year maturity and a 72% conversion premium.
SingaporeÆs largest property developer CapitaLand came back to the market on Friday (May 25) with a S$1 billion ($655 million) convertible bond issue that will secure it a place in the record books in several respects.

Not only is it the largest CB by a Singapore issuer, but it also the longest maturity and the highest premium in Asia ex-Japan ever. The latter two go together in that the longer the maturity, the higher the premium investors are willing to accept as there will be a better chance that the share price reaches the level where the bonds convert to equity.

Still, it is hard to see many other companies being able to pull off this kind of deal û especially following an 89% share price rally over the past 12 months. The stock is currently trading only 5.8% below last monthÆs all-time high.

ôThis company is the bluest of blue-chips and investors have a lot of confidence in the management and its ability to execute on its plans,ö says one observer.

The maturity is 15 years with a first put option at the end of year 10 and a second one at the end of year 12. The conversion premium was set at 72% over FridayÆs volume-weighted average price of S$8.0739. The share price closed marginally above there at S$8.10.

JPMorgan was the sole bookrunner for the issue after keen bidding by several banks, including Deutsche Bank and Merrill Lynch.

The maturity is significantly longer than the 10-year maturity with a seven-year put that the company used on its previous CB that was issued just seven months ago, and which until now has marked the longest effective maturity on an Asian CB outside Japan. Earlier this month that was matched by a seven-year, no put issue from New World Development

The conversion premium was set in the upper end of a 68% to 74% range and exceeded the 65% achieved by Noble Group only 1.5 weeks earlier. The Noble deal had a much shorter effective maturity of four years, however. CapitaLandÆs premium also surpassed the 71% used on a tiny $20 million issue by Indian drug maker Glenmark Pharmaceutical in 2005, which makes it the highest in Asia even when including the high-growth Indian issuers.

To compensate investors for the aggressive maturity and premium, the bonds will pay a coupon of 2.95%, which is high compared with the majority of Asian CBs, which tends to pay no coupon at all. However it is well below US Libor at 5.36% and the 10-year Singapore dollar swaps rate of 3.08%, suggesting CapitaLand is still getting some pretty decently priced debt.

The coupon will also be equal to the yield as the put and redemption prices are both set at 100% of face value. There is an issuer call after seven years, subject to a 130% hurdle.

Because of the solid credit and the fact that you can trade the volatility, the bonds appealed to a wide range of CB investors and the deal ended up being multiple times covered, according to a source. About 50 investors out of Asia and Europe submitted orders during the three hours that the books were open in the Asian afternoon. The stock was suspended from afternoon trading while the transaction was being completed.

The same source said the bonds were trading at 100.1% to 100.2% of face value after the pricing.

The underlying assumptions included a credit spread of 100 basis points and a stock borrow cost of 1.5%. Investors will be compensated for dividends above a gradually rising absolute threshold, which corresponds to a dividend yield of about 1.4% at current prices. This gave a bond floor of 90.75% and an implied volatility of just under 27%. The 100-day volatility is about 39%.

In a release issued after the completion, President and CEO Liew Mun Leong said the interest reflects the ôstrong confidenceö in the companyÆs expansion plans and execution capabilities in Singapore and abroad.

ôThis issue strengthens our financial footing even more as we continue to expand our business across multi-sectors and multi-geographies,ö he said.

According to the term sheet, the company will use the money to finance new investments, to refinance existing debt and for working capital, but it didnÆt specify further. Also on Friday, however, the company announced that its wholly-owned subsidiary in China had bought a prime residential site in Chengdu City in the Sichuan Province at a government land auction for Rmb1.17 billion ( $153 million).

The acquisition is in line with CapitaLand GroupÆs strategy to expand its multi-sector footprint from key gateway cities in Bohai, Yangtze River Delta and Pearl River Delta, to the second- and third-tier cities in the central and western regions of China, it says.

CapitaLand China plans to build 3,800 homes on the site together with some retail facilities. The entire project, which will be developed in three phases, is expected to be completed by 2012. The CapitaLand China Development Fund which is 37.5% owned by CapitaLand China has committed to take a 70% stake in the development project, giving CapitaLand China an effective stake of approximately 56%.

The companyÆs previous CB, which was issued in early October, 2006, is currently trading at about 130% of face value and is close to conversion. The $350 million ($221 million) bond has a 42.8% conversion premium and pays a coupon of 2.1%.
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