CapitaLand buys back S$432.5 million worth of CBs via tender

The Singapore-listed developer fixes the tender price at 111.5% and then buys an additional S$160 million worth of convertible bonds in the open market to reduce its debt service obligations.

CapitaLand will buy back S$432.5 million ($345 million) worth of its 3.125% convertible bond that matures in 2018 through an earlier announced tender offer, it said after the market closed on Friday.

This is slightly more than the S$425 million that the Singapore-listed real estate developer had previously indicated would be the maximum amount, which reflects the fact that the company has chosen to fix the repurchase price below the maximum price and to accept all the tenders received at or below the final price.

As per the announcement, the repurchase price has been fixed at 111.5% of the principal amount, versus an earlier announced maximum price of 112%, and together with S$3.9 million of accrued interest, CapitaLand will pay a total of S$486.1 million to buy back the bonds.

The company had received valid tenders totalling almost S$620 million by the time the offer closed on Tuesday last week.

Separate from the tender, CapitaLand said later on Friday evening that it would also buy back an additional S$60 million of the same 2018 CB. It didn’t explain why it is buying back part of the bonds outside the tender offer, but since it didn’t announce the purchase price for the additional bonds one can suspect that this part of the repurchase was agreed at a lower price.

CapitaLand will use the proceeds from a new S$650 million seven-year CB that was issued on the same day as the announcement of the tender offer (May 20) to fund both the tender and the additional repurchase.

After these two transactions are completed on June 19, the aggregate principal amount of the 2018 CB will be reduced to S$557.5 million. The bond was issued in March 2008 at a size of S$1.3 billion, and currently has S$1.05 billion left outstanding.

As per a separate announcement on Thursday last week, the company will also use part of the proceeds from the new CB to buy back S$100 million of its 2.875% CB due in 2016, which has S$1.2 billion outstanding. It will pay 109.441% for those bonds.

Add it all up and it appears CapitaLand has now used the entire S$650 million raised from the new CB. The deal came with a 30-day upsize option of S$150 million, but given the drop in the overall CB and equity markets, it may be difficult to exercise. The company has said that it is making the repurchases to reduce the principal amount of its outstanding indebtedness and its continuing debt service obligations.

The new CB has a coupon and yield of 1.85%, which is well below the 2.875% coupon on the 2016 bonds and the 3.125% on the 2018 bond. It was also the lowest yield on a seven-year CB in Asia Pacific since 2003. And since the bonds mature in 2020 and have no investor put option, the funding isn’t just low-cost, but long-term as well. The conversion premium was fixed at 32.6% for an initial conversion price of S$5.00 — a level that the stock hasn’t traded at since the middle of 2008.

A number of investors have taken the opportunity to switch out of the old bonds in exchange for the new issue, which has a higher equity value. Some bought the new bonds on the night of the issue, while others have picked up the new paper in the open market in the weeks since then.

This has given the new CapitaLand CB some support in the secondary market as share prices in the real estate sector have tumbled on concerns about rising interest rates, and seven-year Singapore dollar swap rates have fallen.

However, the new CB has definitely not been immune to the sell-off and as of Friday it was quoted at a price of 94 to 94.5. CapitaLand’s share price has dropped 14.6% since the new CB was issued. When the new CB hit the market, the stock had gained about 10% from its 2013 low in early March, but it was still up only 0.2% year to date and had underperformed the Singapore benchmark index.

Despite the sell-off since issuance, a source said the CB is in solid hands, held primarily by outright investors and some high-quality hedge funds. Investors are generally happy to hold CapitaLand CBs because there is no uncertainty about the credit, and sizeable CBs from top-rated issuers are quite rare.

As reported earlier, the new 2020 CB drew strong demand from outright investors, particularly European-based accounts that have invested in CapitaLand before. But thanks to the ability to hedge both the credit and the equity option, there was a lot of hedge fund demand as well. Sources said at the time that the deal attracted more than 60 investors.

According to the source, both institutional investors and private banks tendered CBs as part of the offer. However, some preferred not to sell at these prices, which offered only a slight pick-up versus the market price. When the tender was first announced, the 2018 CB was bid at about 110.5 and there hasn’t really been any trading in it since, the source said. At that time, CapitaLand said it would buy back bonds at a minimum price of 109.

Ten days after the initial tender offer, on May 30, CapitaLand fixed the maximum price at 112% and said it would buy back a maximum of S$425 million worth of CBs. In that same announcement, it noted that it had already received valid tenders for an aggregate principal amount of S$302.5 million at an average price of 111.5%.

The tender was done through a modified Dutch auction, which meant investors were able to submit however many CBs they wanted to sell at a price within the range and CapitaLand then decided on a single price at which it will buy back bonds.

The fact that it chose to fix the price below the maximum shows that it wasn’t just interested in buying back as many bonds as possible, but rather it wanted to balance the size and the price.

Credit Suisse arranged the tender offer. The Swiss bank was also a joint bookrunner for the new 2020 CB issue together with Bank of America Merrill Lynch.

¬ Haymarket Media Limited. All rights reserved.
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