The M$900 million ($246 million) worth of bonds, which are exchangeable into national lottery operator Berjaya Sports Toto, have a five year maturity but can be put back to the issuer after three years. They pay an 8% coupon û fixed at the wide end of a marketing range that started at 7.5% - which is equal to the yield, since the issue price, put price and redemption price are all set at par.
The proceeds from the bonds will be used partly to settle a loan given by Berjaya Sports to its parent Berjaya Land which still has about M$400 million outstanding and has been acting as an overhang on both stocks. Getting rid of that loan should make the share price of the two companies perform better and will also result in more cash for Berjaya Sports that it may distribute to shareholders, analysts say.
The bonds were highly structured to account for the fact that the deal size is bigger than the entire market capitalisation of the issuer - a real estate company mainly focusing on commercial properties and hotels.
Accounting for no less than 160% of Berjaya LandÆs market cap of $150 million, the issue clearly stands out among Asian equity-linked deals which tend to make up no more than 20% to 30% of an issuerÆs market value. To make investors comfortable with the additional credit risk arising from such a brave ratio, the deal was secured by shares accounting for 130% of the nominal bond value.
The shares used as collateral will be held in an account with HSBC and will be topped up if their value falls below 120% of the nominal bond value. In addition, dividends paid by Berjaya Sports will be put into a separate account to fund the coupon payments on the bonds.
According to sources familiar with the offering, the issue was more than one times covered, although about half the bonds ended up onshore with a mixture of Malaysian pension funds, mutual funds, fixed income funds and equity funds. The other half was said to have been placed to international investors who welcomed a chance to diversify their portfolios with a ringgit-denominated EB. For many of the investors, it was the first time they have taken ringgit paper in either the convertible or fixed-income market, the sources say.
The fact that most analysts are expecting the Malaysian currency to continue appreciating against the US dollar helped boost the interest, the sources say, although one of them did note that the banks involved seems to have had to ôgo through every pocket to find demandö as they had been soft marketing the offer for more than a week before the actual launch on Monday (August 7).
Some rival bankers also questioned the information regarding the allocations, saying Malaysian accounts may in fact have taken a bit more than half the issue û perhaps as much as two thirds - as international investors said they found it too expensive.
The equity premium, which was fixed at 19% over MondayÆs close of M$4.36 after being marketed in a range of 19% to 22%, was one feature investors may have been unhappy with. At first glance this would seem to make the issue quite equity-sensitive, particularly together with the conversion premium reset after year two, three and four, down to a floor which equals the pre-issue share price.
Most buyers were also said to have participated in the deal on the back of the equity story. Says one observer: ôPeople have noted that Malaysia is one of markets that hasnÆt really had a run in the latest Asian equity rallyàand if you essentially have a relatively low strike option, which is resettable as well, this is a pretty decent way to play the market. Especially together with the ringit appreciation.ö
However, given that Berjaya Sports currently trades at a trailing dividend yield of 11.7% and can pay a 10% yield without the issuer having to compensate the bondholders, the conversion premium will effectively increase by 10% per year, or a total of 30% over the three-year life of the bond.
ôIt would seem there is a limited likelihood that the bonds will go in-the-money,ö one CB specialist says.
In the past 12 months the share price has risen 15.3% and a couple of recent research reports by Macquarie Securities and Yuanta Core Pacific/Kim Eng puts the 12-month target price between M$4.92 and M$5, which suggests a potential upside of between 12.8% and 14% from the current market price. The shares were unchanged at M$4.36 on Tuesday following the EB issue, while the bonds, which saw virtually no trading, were bid at 100% to 100.5%, according to people familiar with the issue.
The same people said the bonds were priced with a 97% bond floor and an implied volatility of 17.5%-18%, which was in line with the historic volatility of 18%. There is an issuer call after three years, subject to a 130% hurdle.
The credit spread was assumed at 400 basis point over the three-year Malaysian swap rate, which is based on a spread of 600 basis points over for Berjaya Land adjusted for the stock collateralisation. The bonds are rated single-A by the Malaysian Ratings Corporation. The stock borrow cost was assumed at 5% as there is no lending available.
Expensive or not, at the end of the day the bookrunners got the deal done against a backdrop of Malaysia having seen no international equity or equity-linked deals at all this year. The most recent equity-inked offering out of Malaysia was an $80 million deal arranged by HSBC for Transmile Group in May 2005.
Following the equity market correction in May and June this year, Asian convertibles have become a bit of a scarcity and have also come down significantly in size with only one of 10 CBs issued since mid-May being larger than $200 million. They have also been ôvery cheapö to ensure sufficient demand, according to one CB specialist.
To sell a $246 million equivalent ringgit-denominated bond in that kind of environment is no small feat, even if more than half the bonds were to have ended up onshore.
Making this possible was the fact that Berjaya Sports is a privately-owned bluechip company with a $1.6 billion market cap that is a member of MalaysiaÆs benchmark KLSE Composite index. The company has a good cashflow and defensive qualities such as solid resilient earnings that make it an outperformer in tough markets. It is also an alternative to the traditional state-owned enterprises that make up a large part of the Malaysian stock market.
ôThe CB is a good, defensive way of getting exposure,ö notes one observer. However, some investors felt they might as well buy the stock given the high dividend yield.
To find the only other ringgit-denominated exchangeable marketed to international investors, one has to go back as far as November 2003 when conglomerate Multi-Purpose Holdings completed a M$300 million ($79 million) issue exchangeable into number forecasting gambling company Magnum. Deutsche Bank was the sole arranger of that issue, which was said to have been sold 60% offshore.
ôThis is good for Malaysia in the sense that it gives people confidence to hold the currency,ö one observer said of the Berjaya offering.