Ayala offers respite for equity-linked investors

A $300m exchangeable bond into Philippines property developer Ayala Land provides cheap funds for the parent and welcome diversification for investors.
Bonifacio High Street, an Ayala Land development
Bonifacio High Street, an Ayala Land development

After digesting a week of issuance from high-growth, high-beta Chinese tech and gaming companies, equity-linked investors were relieved on Thursday evening to see a deal for Philippines blue-chip Ayala Land.

The $300 million bond was issued by Ayala Corp, the parent company, and is exchangeable into shares of Ayala Land, which has become a popular stock with investors thanks to its solid reputation and recent rapid growth — profits rose 30% last year.

That’s not quite Chinese internet growth but Ayala Land offers considerable comfort as a large and liquid stock that offers a different type of exposure to the companies coming out of China. It is the third-biggest company by market capitalisation on the benchmark Philippines index and, as one equity-linked banker put it, “everyone that covers the stock has a screaming buy on it”. More accurately, 13 out of 14 analysts cited on Bloomberg have "buy" calls on Ayala Land.

That confidence in the stock gave Ayala Corp an opportunity to divest some of its stake at attractive levels in return for three-year funding at just 0.5% — the lowest coupon of any equity-linked bond this year (with the exception of a zero-coupon exchangeable tender offer into China Overseas Land & Investment in mid-January).

Cutting its exposure to property also fits with Ayala Corp’s strategic shift into energy and infrastructure investments, though a deal of this size makes only a small dent in its Ayala Land holding — down to 46% from 49%.

The deal launched at 6pm with a standard structure: a five-year maturity, three-year investor put option and a three-year issuer call option subject to a 130% hurdle. In coordination with sole lead Goldman Sachs the company wall-crossed a group of investors ahead of the deal and had the order book covered at launch, when it was marketed with a coupon of 0.25% to 0.75% and a conversion premium of 20% to 25%.

That gave a conversion price of P36.48 to P38 based on the closing level of P30.4 on Thursday. The deal ended up pricing at the cheap end of that range.

Shares in Ayala Land are up 28% since early December, though the stock has a relatively low volatility of around 32% and can only be borrowed in synthetic form due to regulations in the Philippines, which meant that hedge funds played a small role in the deal at 30% of the allocation. Long-only investors took the rest of the deal and 70 accounts participated in total.

Most investors used a credit spread of 250bp, though some were comfortable at tighter levels. With implied volatility at 27% or 28%, this produced a bond floor of around 91%. The bond was trading flat or very slightly down during Friday trading and Ayala Land shares were down 3%.

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