CapitaLand has increased the size of the 10-year convertible bond that it issued earlier this month by a further S$50 million to a total of S$800 million ($636 million) after a strong initial response to its tender offer for three outstanding CBs.
The move suggests the Singapore-listed real estate developer expects to be able to buy back roughly that same amount of bonds.
CapitaLand earlier said the proceeds from the new issue would be used mostly to refinance existing debt, including outstanding CBs, and, according to a source, the intention is to match the size of the new CB with the amount of bonds it will buy back through the tender.
In an announcement issued on Friday evening, Hong Kong time, CapitaLand said it had received valid tenders from investors for S$510.75 million worth of CBs (in terms of face value) and firm commitments to tender a further S$93 million worth. That brings the total potential buy-back amount so far to S$603.75 million, before taking into account accrued interest and the fact that the company may pay up to 11.5% above the principal value for some of the bonds.
The company did not say at what prices the tenders had come in, but the source said all the submissions so far had been at or below the maximum price. And given how strong the response is already, other investors will likely have to tender at a more issuer-friendly price in order to get accepted. So, it would be surprising if CapitaLand ends up having to pay the maximum price.
When the company launched a similar tender in May, it received tenders for a total of S$302.5 million worth of CBs in the early part of the tender period but, by the time the offer closed, the amount tendered had increased to almost S$620 million. This suggests many investors wait until they know how successful the tender is likely to be until they decide whether to participate, and could mean that CapitaLand will receive more valid tenders in the next few days.
Because of the strong response, the company and Credit Suisse, which acts as the dealer manager for the offer, have decided to accelerate the offer and investors now have until this Thursday (October 3) to submit their tenders. The original deadline was October 10.
Investors are not as keen to sell back all three CBs, however. In fact, CapitaLand said in the announcement it had received no valid tenders at all for the 2.1% CB due 2016. This may be partly because the minimum tender price is set below par and because the company was only going to announce the maximum price on September 30.
However, CapitaLand has now decided that the maximum price will be the same as the minimum price, namely 97% of the principal value, which suggests that it probably will not receive many tenders for this particular bond in the next few days either.
This is obviously a deliberate strategy by the company as it would likely prefer to buy back the other two CBs since they have higher coupons – both compared to the 2.1% 2016 bond and compared to the new CB, which pays 1.95%.
As of last Friday, CapitaLand had received valid tenders for S$285.5 million and commitments to tender for S$93 million worth of the 2.875% CB that is due in 2016.
It had also received valid tenders for S$225.25 million worth of the 3.125% CB due in 2018.
As reported earlier, investors can tender the 2.875% CB at a price between 102% and 106%. This bond was issued in September 2009 at a size of S$1.2 billion and has S$971 million left outstanding.
The tender price for the 3.125% CB is set between 108% and 111.5%. The reason why the range is so much higher for this particular bond is because it is still accretive and has a redemption value of about 109%, the source said. In fact, the tender price ranges for all three CBs were set to straddle the current market prices, with a slight added incentive for the two higher-coupon bonds.
The 3.125% CB was issued in March 2008 and becomes puttable in 2015. It had an initial size of S$1.3 billion and has S$557.5 million left outstanding.
Meanwhile, the 2.1% CB was issued in November 2006 at a size of S$430 million, and will have S$184.75 million left outstanding after taking into account the amount of bonds that will be redeemed in November as a result of a put option.
The S$50 million worth of CBs that were issued as a result of the recent 2023 issue being upsized to S$800 million from S$750 million were allocated among the investors who participated in the bookbuilding on September 19. There would have been plenty of left-over demand even though the deal was already upsized to S$750 million from S$600 million at the time of pricing. However, based on earlier information, the base deal was about two times covered.
The CB has also traded well in the after-market, reaching a price of 102 at one point. As of last Friday it was trading between 101 and 102. CapitaLand’s share price has fallen 2.2% since the CB issue just over a week ago, while the benchmark Singapore Straight Times index has lost 1.3%.
The new CB has a 10-year maturity with a five-year put. It pays a coupon and yield of 1.95%, which was equal to best terms for investors, while the conversion premium was fixed above the bottom of the indicated range, at 30% over the latest market price of S$3.24. This resulted in an initial conversion price of S$4.212 – a level that the stock has not traded at since January 2010.
CapitaLand’s share price has had a difficult time this year and Friday’s close at S$3.17 puts it 21% below its 2013 high of S$4.03, which it hit in late January.
The terms on the CB were viewed as fairly aggressive, particularly with the implied volatility ending up at 18.9%, which is in line with a historic volatility of 19% to 21%. CapitaLand was able to get away with it, though, because of its credentials as the largest real estate developer in Singapore and its strong credit profile. The Asian market is also relatively starved of new CBs this year, and investors were happy to see new supply from a quality issuer.
At the enlarged size of S$800 million, the new issue will account for close to 4.5% of the existing share capital, if fully converted.
The tender is being done through a modified Dutch auction, which means CapitaLand will determine a single purchase price for each bond. The final amount of bonds that it will buy back will depend on the amount tendered and the price, but the total will not exceed the S$800 million raised from the new bond, the company said on Friday.
CapitaLand has several CBs maturing or becoming puttable in a relatively concentrated period between 2015 and 2018 and the combination of the new CB and the tender offer is designed to extend its maturity curve and reduce the amount of bonds it will need to buy back in those particular years. The fact the new CB comes with a lower coupon than the ones it is buying back will ease the pressure on its balance sheet even further.
In addition to being the dealer manager for the tender offer, Credit Suisse was also the sole bookrunner for the new CB issue.
