CapitaLand issues large CB in tough market

At an implied volatility of about 22% the pricing of the convertible is generous, but market sources question whether the bonds have been fully placed.
CapitaLand returned to the market last Thursday with another convertible bond, raising S$1.3 billion ($920 million) for debt repayments and new investments. The move surprised most market participants since both the equity and credit markets remain jittery and most other companies are choosing to hold off on new issues for the time being û unless they are in desperate need of cash.

The latter is definitely not true of CapitaLand, which had more than S$3 billion of cash on its balance sheet before this transaction. To go for this size in these market conditions was also viewed as unnecessarily bold, and the real estate developer paid the price as the terms were a lot cheaper than on its most recent CB in May last year and on a CB issued in December 2006, which had a similar maturity profile. Last year's CB met with strong demand and set a number of records, including the longest maturity for a convertible in Asia ex-Japan with a 15-year maturity, 10-year put structure, and the highest conversion premium with 72%.

It was also the largest CB by a Singapore issuer at S$1 billion, although that has now been broken by last weekÆs issue which could increase to as much as S$1.5 billion if the S$200 million upsize option is exercised. The latest deal has a 10-year maturity with a seven-year put, which is the same maturity as the CB issued by CapitaLand in December 2006. They can be called by the issuer after five years, subject to a 130% hurdle.

The new bonds were launched with a fixed coupon of 3.125%, a conversion premium of 46% to 56% and a yield ranging from 3.5% to 3.95%. The premium and the yield were both fixed at the most favourable end for investors, at 46% and 3.95% respectively.

Even so, market sources believed sole bookrunner JPMorgan had been unable to place the full amount into the market on the night and was likely holding a portion of the bonds on its own books. One indication of this was that several investors said they had been allocated 100% of what they had ordered. The bonds also traded below par in the grey market during the bookbuilding, which means investors would have been reluctant to buy the bonds at full price from JPMorgan when they could get them cheaper elsewhere. One bond trader said the CapitaLand CB had changed hands at 99.50 on Thursday evening.

On the other hand, many of CapitaLandÆs existing investors would have felt forced to buy the bonds because the price on the outstanding 15-year CB tightened by about 4bp-5bp to 84%-85% of the face value from about 89% prior to the deal. By buying the new bonds, they would even out the losses on the old one. But with an implied volatility of about 22%, the new bonds were also significantly cheaper than the old bonds. The bonds issued in 2006 trade at an implied volatility of about 32%, which would have made it attractive to switch to the new issue.

JPMorgan never re-offered the bonds below par and during FridayÆs trading, they traded up to about 100.50-101, while the share price dropped 1.7% to S$5.80. While this could be an indication that the bonds had been fully placed, market sources say it was more likely the result of the bookrunner holding on to most of the bonds that it had been left with in order not to put downward pressure on the price. And given that CapitaLand is a liquid name with plenty of borrow available to allow for the equity option to be hedged, it shouldnÆt be too difficult for anyone sitting on even a large portion of bonds to trade out of it in a reasonably short time.

JPMorgan is also for all respects and purposes the ôhouseö investment bank for CapitaLand, having been involved with numerous of the groupÆs find raising activities over the past few years, including several IPOs and the two most recent CB issues. This may have made it more willing to meet the managementÆs wishes and do the deal now. Deutsche Bank and Merrill Lynch were also said to have been competing for the deal.

The 46% premium translates into a conversion price of S$8.6140, which is higher than the companyÆs record close of S$8.60. However, it is significantly below the conversion price of S$13.88 that the company achieved for the 15-year bonds that it issued in May. At the time of that sale, CapitaLandÆs share price was trading at around S$8.10. It reached a similar level in late October last year, but since then it has been on a declining trend, losing about 28%.

In a written statement, CapitaLandÆs group chief financial officer, Oliver Lim, argued that the CB had enabled the company to secure a significant amount of long-term money at attractive terms despite the volatility in the global markets. This will allow it to extend the maturity profile of its core debt requirements even further, which he referred to as ôprudent capital management - especially during these turbulent times.ö

ôIt also provides us with ample financial capacity to take advantage of business opportunities that might arise in the future,ö he added.

One source noted that the company likely wanted to replenish its cash reserves after it offered to spend up to S$989.5 million ($690 million) to buy the rest of Ascott Group last month. Ascott operates serviced apartments in Asia Pacific, Europe and the Middle East and is already 66.5%-owned by CapitaLand. The share price of many potential targets have been coming down significantly in recent months, and companies with a lot of cash on hand are likely to be able to react quicker to any potential acquisition opportunities.

The fact that the company decided to do a deal now while the markets are still very tricky, does however also signal that the management doesnÆt expect a turnaround for the better anytime soon. That could end up putting more pressure both on the outstanding CBs and the share price.

In line with what has become common practice over the past two months, especially for names where you can hedge the equity option, the CB was offered without any credit bid. However, JPMorgan was indicating a spread at 275bp over the Singapore swaps rate, which some agreed was correct and others said was too tight. On Friday there were seven-year credit default swaps quoted in the market at 310bp, according to CB bankers.

Assuming a stock borrow cost of 1% and the fact that the company will be able to pay out a gradually rising dividend û starting from 8 Singapore cents per share in 2007 and increasing to 36.94 cents in 2018 without compensating the bondholders û the bond floor comes out at about 91%.

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