An increased S$380 million ($208 million) five-year transaction was priced earlier than expected yesterday afternoon Asian time (Thursday) after books closed 2.25 times oversubscribed. The transaction set a number of firsts and for sole lead manager JPMorgan was a particularly important credibility enhancing exercise as the bank attempts to establish a firmer ECM footprint in Asia.
To win the deal, it beat Credit Suisse First Boston, Goldman Sachs, Morgan Stanley and UBS Warburg and predictably, the subsequent issue stirred controversy among convertible experts. But at the end of the day, the lead appeared to have got away with aggressive terms after correctly reading that investors are looking to move out of cash and into interesting non-tech related stories.
As CapitaLand's deal represents the first meaningful local currency issue, the company now holds the proud distinction of being the one to have established a new sector for Singaporean Inc. On a global scale, it is also believed to have secured the highest ever conversion premium for a property company.
Terms comprise a par in par out structure with a 0.625% coupon and a 29% conversion premium to spot. There is also three-year hard no call thereafter subject to a 130% hurdle and a three-year put option at par to yield 0.625%.
Underlying assumptions comprise a bond floor of 89%, fair value of 104.2% and implied volatility of 32.13%. This is based on a credit spread of 180bp over Sibor (200bp over Libor), a dividend yield of 1.5%, stock borrow cost of 0.75% and volatility assumption of 45%.
For convertible experts, the two most noteworthy aspects of the transaction are the credit spread and volatility assumption. All believe that the volatility appears expensive given an average 50-day volatility of 35% during the latter half of 2001. Opinion remains split, however, on the credit spread.
Some note that a sister company of the Singapore Technologies group, ST Assembly (STATS), priced a three-year puttable deal at 475bp over Libor only last week. Yet STATS has a much weaker balance sheet and in terms of CapitaLand's most comparable credit benchmarks in the convertible asset swap market, the deal appears fairly priced at first sight.
For example, Hang Lung Properties, which is an implied Baa1 credit, launched a transaction with a three-year put two weeks ago at 120bp over Hibor (125bp over Libor). Similarly from Singapore itself, BBB- rated Chartered Semiconductor is currently being quoted at 200bp over Libor for four-year paper.
However, some bankers argue that there is limited credit appetite for CapitaLand's paper because the company is quite aggressively leveraged. "Most of the Singaporean banks are already sitting on a large number of secured credit lines and they're not going to want to swap out these for an unsecured and callable asset swap unless it is for a considerable premium," one banker comments.
As of December 31, the company reported gross debt position of S$8.81 billion ($4.82 billion) and a net debt position of S$6.88 billion ($3.65 billion). Significantly, S$4.795 billion ($2.62 billion), or just over half the amount, is short-term and up from S$4.3 billion the year previously. This gives the company a gearing ratio of 87% and because it has had to provision quite extensively, a very poor interest coverage ratio of only 0.92 times (3.05 times without provision).
CFO Lui Chong Chee explains that one of the company's main strategic aims is to re-model its balance sheet and says that S$1 billion in debt has already been paid down over the last three months. "The whole purpose of this Singapore dollar-denominated convertible has been to re-finance our bank lines and we're very pleased to have been able to do so at a cost effective price which reduces our interest expense and is EPS accretive," he comments.
"Ideally, we would like our debt profile to match our asset profile and the optimum maturity is about 4.2 years," he adds. "This is based on an average maturity of 18 to 24 months in the residential property sector and five to seven-years in the commercial property sector. At the moment, the average maturity of our debt is just under four years."
He also notes that the company is moving towards a gearing ratio of 60% by 2005 and states that had there been no provisioning, the ratio would have moved down to 76% by the end of the 2001 financial year.
The second plank of the group's strategy to reduce debt and improve ROE comes from its programme to dispose of non-core assets. CapitaLand was formed as a result of a merger between Pidemco and DBS Land in November 2000 and at the time the new company said it hoped to offload S$3 billion in non-core assets over a three to five-year time frame.
"We're well ahead of our targets," Lui says. "Last year, we disposed of S$1.7 billion and this year we aim to dispose of a further S$500 million to S$1 billion."
Lui further notes that the company only began to seriously consider a convertible issue about two weeks ago. In some respects, CapitaLand's deal also moves the market one stage further than Hang Lung Properties' HK$2 billion ($257 million) issue of early March led by CSFB. The perceived strength and longevity of the HK$/US$ peg made currency something of a non-issue with the Hang Lung deal. Where the Singapore dollar is concerned, this is not be the case and lead bankers acknowledge that the structure is one that only blue chip Singaporean borrowers will be able to avail themselves of.
Where the stock is concerned, the counter closed the year down 3.74% on Thursday against a 10.487% increase in the Straits Times Index. The stock was also the most actively traded of the day, with a total of 36.1 million shares changing hands against a two-month average of 5.16 million.
This upward spike was partly the result of a short squeeze as arbitrageurs put their shorts in place. However, while there was said to have been $70 million of borrow available a week prior to launch, most of the amount had been sucked out of the market in the immediate run up to launch.
But the spike was also partly the result of investors dumping the stock because the convertible will dilute EPS. On full conversion, the deal will represent 21.1% of CapitaLand's free float. By the end of the day, CapitaLand had consequently traded down 4.762% to close at S$1.80, while City Developments traded down 4.317% as investors bet that it might follow suit with a deal of its own.
Lead officials say that the majority of the CapitaLand deal was placed with outright accounts and report a total of 30 investors, of whom 80% came from Europe and 20% Asia. "We got five big anchor orders within 45 minutes of launching the deal after Singapore's close," says Michiel Steenman, head of Asian equity capital markets at JPMorgan. "That was very pleasing."
For most investors, CapitaLand would have present welcome diversification from Taiwan and an improving credit profile, both in terms of the strides the company has made to de-leverage its balance sheet and on a macro level, from a turn-around in the Singapore property market.
Having been plagued by low yields and falling house prices, the company is now convinced the worse is over. With signs of confidence return to the market, it believes it will not have to provision for its 2002 results.
For the previous financial year, the company posted a net loss of S$275 million ($150 million) on the back of S$747 million in provisions and a revaluation deficit of S$424.9 million. Against this, overall revenue increased 15.3% and without provisions the company would have reported a net profit of S$416.6 million.
Having blazed a trail in the domestic securitization market and tried to do the same with its failed REIT offering, CapitaLand has now stamped its mark in the convertible sector. For JPMorgan, the deal also underlines its reputation for innovation in the Lion City. Philip Lee, the bank's South East Asian head of investment banking concludes, "We're immensely proud to be associated with this transaction and its success shows that there's a natural market for domestic currency issues. Singapore is open for business."
