Indonesian coal miner Bumi Resources late last Thursday raised $300 million from its second convertible bond issue in less than four months. The first deal, a five-year offering with a two-year put, has traded well which no doubt helped bring investors into this trade too, although the second offering was not nearly as popular as the first, which was upsized to $375 million from an initial $200 million.
The fact that the company returned to the market so soon after the first issue, which was priced on July 29, would have caused some concern among investors, however. Not to mention that the company also raised $300 million from a seven-year high-yield bond earlier this month. One source said the challenge was to price the new CB cheap enough to sell, but not so cheap that it would penalise the investors who bought the first deal. And while the order book was tight, it appears the company and sole bookrunner Credit Suisse succeeded in doing that. As of late Friday in Asia, the first bond was holding up at around 110% of face value, while the new bonds were bid slightly below par at 99.5.
Another hurdle for the bookrunners was the fact that some potential investors, after buying the first CB, were already close to their internal limits that guide how much exposure they can have to a credit like Bumi. As a result, some of them were not able to participate at all.
Not surprisingly, the second CB, which has a seven-year maturity, was priced at best terms for investors, but the company still achieved a significantly lower coupon on this deal compared with the first CB, at 5% versus 9.25%. It achieved this by including a put option at the first anniversary, followed by two more after 2.5 years and five years. The deal also offers additional yield for investors who choose either to put the bonds back to the issuer or to hold them to maturity, with the yield to put and maturity fixed at 5.75%.
A CB specialist estimated that the use of a one-year put, as opposed to the two-year put Bumi used on the July deal, would result in a saving of about 250bp on the coupon. Like on the first deal, the coupon will be paid monthly. The coupon was offered in a range between 4% and 5%, while the yield to put and maturity was offered at 4.75% to 5.75%.
The deal came with a fixed conversion premium of 30%, although, like on the first deal, the reference price is based on the volume-weighted average price over the three days following the pricing. This means that investors won't know until after the close on Tuesday at what price the CBs will convert into shares. The first day, on Friday, the share price moved in favour of the company, gaining 7.6% to Rp2,825. The gain was driven by news that Bumi has increased its stake in a local mine.
The offering was said to have attracted about 40 investors, comprising a mixture of outright accounts which liked the high bond floor - which at the bookrunner's assumed credit spread worked out to be 96% - and hedge funds, which like the fact that Bumi is one of the most liquid and volatile stocks in Indonesia. Like on the July CB, Bumi will also spend part of the deal proceeds to buy back its own shares in the market, which it will then swap with Credit Suisse, which in turn will do a second swap with the CB investors to allow them to establish a short position in the stock. This will enable investors to hedge the equity option of the CB, making the deal more attractive to hedge funds. The company didn't disclose how much of the proceeds it would use for the equity swap.
The valuation of the latest CB was slightly more favourable than on the July deal, thanks in part to the tightening of credit spreads since then. Bumi's earlier five-year CB is currently trading at 950bp over Libor, while the spread at launch was assumed at 1,000bp. Meanwhile, the company also has a smaller outstanding CB, which becomes putable in October next year and which is trading at a spread of 875bp. Using these two as references, the new CB was marketed with a credit spread assumption of 900bp. At that level, the implied volatility was about two vol points cheaper than where the previous CB is trading now, or roughly 28.5% for the new one versus 30.5% for the existing one.
CB Investors will get compensated for dividend payouts above a 4.25% yield and thanks to the synthetic stock borrow arrangement, the stock borrow cost was estimated at 3%.
One reason why investors may have been willing to overlook Bumi's aggressive fund raising is that the company has recently teamed up with Chinese sovereign wealth fund China Investment Corporation with the aim of pursuing joint investments. That suggests Bumi will not slow down in its search for growth enhancing acquisitions.
CIC said in September that it would invest $1.9 billion in high-yield debt issued by Bumi, which will pay a coupon of 12% annually plus an amount at final maturity such that the investment will yield CIC an internal rate of return (IRR) of 19%.