CCT deal breaks CB drought û but who bought it?

The Singapore-listed CapitaCommercial Trust issues $203 million worth of convertible bonds that are priced at the wide end of terms.
CapitaCommercial Trust (CCT) has raised S$280 million ($203 million) from a convertible bond which will go towards the refinancing of short-term debt and the possible acquisition of a commercial property on 1 George Street in Singapore, which was announced last week.

The Singapore-listed real estate investment trust (Reit) could end up raising a further S$90 if the overallotment option is exercised in full.

The offering, which was completed on Tuesday night Hong Kong time and is the first CB by an Asia-listed issuer since KhazanahÆs $550 million exchangeable sukuk in early March, was fully underwritten by Standard Chartered so CCT will get its money. However, it was less clear how much of the bonds were sold into the market and sources estimated that Standard Chartered was still holding a significant portion of the deal yesterday.

One source close to the deal said about 40 investors participated in the offering and that it was fully covered, but few market participants were willing to accept that at face value since other indicators were telling a different story.

For one, it was difficult to find investors among the top 25-30 usual buyers of Asian CBs who had actually put in orders for the bonds even at the wide end of the terms, which is where it ended up pricing. Market participants say the bookrunner was also offering bonds slightly below par in the secondary market early Wednesday (even though, according to CCT, the book was already closed by then) but found few, if any, takers. However, it is worth noting that the deal was never officially re-offered and according to a press release issued by CCT yesterday, the bonds were issued at par.

Another indication that the deal had struggled was the fact that there was no trading of the CB in the secondary market yesterday and Standard Chartered wasnÆt making a market. This would typically mean that a large chunk of the deal had been taken up by one, or possibly a few, anchor investors to hold on for the long-term. However, sources pointed out that if this was the case, the underwriter would have wanted to flag it to other investors to instill confidence in the transaction and that was not done. Consequently, the speculation in the market yesterday was that Standard CharteredÆs prop desk had bought a large portion of the offering.

If so, this may not necessarily be a bad move since Standard Chartered has broad-based business relationships with CCT across many products and may have otherwise ended up providing the same amount of money through a loan, which in all likelihood would have had to be done at a lower credit spread than what was used on the CB.

At a glance, the CB does not look unattractive by any means with a 2% coupon that was fixed at launch, a conversion premium of 23.9% and yield-to-put of 3.95%. According to sources the bookrunner also provided credit default swaps for one-third of the deal at about 380bp and offered stock borrow provided by the majority shareholder as part of the package. The stock borrow cost was reportedly set at 150bp. As a result it would have been possible for the CB investor to hedge both the credit and the equity option û something which has worked as a redeeming feature on other CBs earlier in the year in terms of convincing investors to buy.

However, the real crux appeared to be that investors simply do not like the property sector at the moment and Singapore Reits have been particularly out of favour over the past six months. CCTÆs share price has fallen 36% from a high in July and there are plenty of other property developers and Reits that have fared a lot worse than that. CCT lost another 0.9% yesterday in the wake of the CB issue, even as the broader market gained 2.6%.

ôEveryone is deleveraging at the moment - not investing. And if you want to increase your exposure you can pick up quality names in the sector at very cheap prices,ö says one observer. Looking at CBs in particular, he says, there are a lot of names that trade at 80 or 90 cents to the dollar.

Such an environment is difficult enough for a bank that is a frequent arranger of CBs to tackle, and for Standard Chartered, which is a relative newcomer in this space and thus is bound to have fewer established relationships with CB specialist investors on the distribution side, the challenge would be even greater.

However, the source close to the deal said assumptions have started to change in recent weeks and if you structure the transaction right and build in sufficient hedges both on the credit and equity side, it is definitely possible to do a CB in the current market.

The bonds have a five-year maturity, but can be put back to the issuer at the end of year three at the accreted value. There is also an issuer call after three years subject to a 130% hurdle. The bones were offered with a conversion premium between 23.9% and 32% and with a yield between 3.5% and 3.95%. If fully converted, CCT will have to issue new units equal to about 7.5% of the existing share capital, although there is a possibility to settle in cash.

Based on the final conversion premium and yield and a 380bp credit spread, sources estimated that the bond floor would be about 94.5%-94.75%. The implied volatility was said to be about 18% to 20%, but sources say this was cumbersome to model because of an unusual structure of the dividend protection and many simply decided not to bother since they werenÆt about to buy the CB anyway. However, even if it were to end up above 20%, it would still be well below the historic vol which is just above 50% on a 100-day basis and just above 40% on a 260-day basis.

Essentially, the dividend protection works the opposite to the normal practice where the conversion premium is adjusted if the dividend payout goes above a certain threshold. In this case, investors are compensated for dividends up to 22 Singapore cents on an accumulated basis (plus all special dividends) and for dividends above that level if they meet certain tests. Current payout levels suggest that this will essentially result in a full dividend pass-through for the first three years, which should be positive for investors. However, the cumbersome way in which it was structured appears to have put off a lot of players and may have ended up overshadowing the positive factors.

Unfortunately, at a time when the market needs positive signals and a few successful deals to inspire confidence û both among investors and issuers û this deal may add further to the hesitation about bringing CBs to the market.
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