Casino operator brings ringgit convertible

Desire to see bonds convert prompts Resorts World to use rare negative yield structure.
MalaysiaÆs only casino operator, Resorts World, has raised M$1.1 billion ($300 million) from a convertible bond that was well received despite offering a negative yield.

Demand was likely underpinned by the scarcity of equity-linked issuance out of Malaysia, especially ringgit-denominated offerings. However, Berjaya LandÆs $246 million equivalent exchangeable bonds last month, which is the only equity-linked deal out of Malaysia this year, was also denominated in the local currency.

A majority of the Berjaya bonds was sold onshore though, as was the M$300 million exchangeable into forecasting gambling company Magnum in November 2003. This makes Resorts World the first ringgit-denominated deal to be sold almost entirely into the international market.

Sources say a couple of Malaysian accounts participated, but together accounted for only a marginal portion of the total deal. Most of the 40 or so buyers were said to have been global investors, with an overweight towards CB specialists. People familiar with the offering described the demand for the $3.5 billion market cap casino and hotels operator as ôrobust,ö although the order book was only referred to as being covered.

CIMB, Deutsche Bank, HSBC and JPMorgan acted as joint bookrunners for the deal, while CIMB and ECM Libra Capital were hired as financial advisers to the issuer.

While common a few years back when interest rates were much lower, negative yields are rarely seen on CBs nowadays but highlights the issuerÆs desire to have the bonds convert in order to get equity on its balance sheet. The only other issuer to offer that kind of structure this year is Tata Motors, but that was on a yen-denominated deal.

When the Indian truck and bus maker launched its $100 million-equivalent offering back in February it was the first negative yield CB in more than a year.

The bonds sold by ResortÆs World also have a short maturity of only two years, a conversion premium of only 10% and two conversion price resets û after the first year and 60 days before maturity û making it all but inevitable that the bonds will convert.

There is an issuer call after one year, subject to a 120% hurdle, to force conversion in case investors drag their feet.

The reset mechanism has a floor at 90.9% of the original conversion price, which is high compared with the typical reset floor at 80-85%. The floor is equal to yesterdayÆs volume weighted average price.

ôThe issuer is essentially saying that it is happy to sell equity at todayÆs market price, but not lower,ö one observer says, adding that the expected appreciation of the ringgit makes the bonds a reasonable proposition even with that cap.

The negative yield was achieved by issuing the zero-coupon bonds at par and setting the redemption price at 99%, which results in a yield to maturity of -0.5%. The bonds were marketed to investors with a yield range of -0.5% to -1.1% before being fixed at the generous end.

The conversion premium was fixed at launch at 10% over yesterdayÆs (September 7) volume weighted average price of M$11.593, giving an initial conversion price of M$12.75.

The bonds were priced assuming a credit spread of 40 basis points over the Malaysian interest rate curve, a dividend yield of 2.2% or 120% of the previous yearÆs, and a stock borrow cost of 5%. There is no stock lending available at the moment, although Resorts World, which is a subsidiary of conglomerate Genting, is among a group of stocks that is qualified for short-selling once this becomes available.

Between them the bookrunners were said to have provided asset swaps at the 40 basis points level. Only a small portion was taken up as investors likely felt there was little need to hedge the credit.

The bond floor was set at 90.7%, which one observer says is ôreasonably attractiveö given the strong focus on conversion and the implied volatility is 24%. The share price is up a modest 4.5% this year to ThursdayÆs closing price of M$11.70, which compares with a 6.2% gain in the Kuala Lumpur Composite Index.

Analysts are, however, optimistic that the companyÆs casino operations will drive earnings growth, and of the 19 analysts that cover the company, according to Bloomberg data, 16 have a ôbuyö or ôoverweightö recommendation. At the end of last week, the company posted a 45.8% drop in its second quarter net profit, although the decline was primarily due to one-off capital gains in the comparable period last year.

Berjaya LandÆs exchangeable bond in early August was arranged by AmMerchant Bank and Merrill Lynch, while Multi-Purpose HoldingsÆ EB into Magnum back in 2003 was led by Deutsche Bank.

¬ Haymarket Media Limited. All rights reserved.
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