First Gen CB upsized to $260 million

The Philippine power producer tackles an unfavourable market to refinance debt raised for an earlier acquisition.
Independent Filipino power producer Fist Gen has raised $260 million from a convertible bond that will be used to pay off more expensive debt taken up in connection with the acquisition of a majority stake in PNOC-EDC in November.

A First Gen-led consortium, that also included Netherlands-based Spalmare and Prime Terracota, paid about $1.4 billion for the governmentÆs remaining stake in PNOC-EDC after winning a competitive auction. The acquisition gave them 40% of the equity and 60% of the voting power in the countryÆs largest geothermal power producer.

The CB was initially launched at a base size of $225 million with an upsize option of $75 million, of which $35 million was immediately exercised. The remaining $40 million will be retained by sole bookrunner JPMorgan and may be sold later if the bonds trade well in the aftermarket.

The base deal was multiple times covered by about 50 investors, although the fact that the upsize option was only partially exercised suggests that demand may not have been overwhelming. Both the conversion premium and the yield were also fixed at the most generous end of the offering ranges, indicating that investors were also price sensitive and that there was a bit of a trade-off between the larger size and the pricing.

The latter isnÆt that surprising given that the CB comes against the backdrop of a sharp widening of Philippine credit spreads. According to a source, the five-year credit default swap for the sovereign has widened to about 210bp from 158bp just two weeks ago, which has resulted in the government deciding to hold off on a planned issue of new sovereign bonds. This would have led to caution with a name like First Gen, which is not rated, has no stock borrow and was offered without any credit bid.

First Gen, which is controlled by the Lopez family, is also a highly leveraged company which is expected to make more acquisitions in the future that will require funding. However, it does have a good equity story and that is what investors bought into, the source says.

According to an investor presentation in early November, the company is planning to almost double its net attributable capacity to 1,968 megawatts by 2011 from 1,098 MW today, through a combination of acquisitions and greenfield projects. The consensus target price among analysts covering the stock is Ps72, which suggests a 33% upside from current levels.

Compared with the other two Asian CBs that have hit the market so far this year, the conversion premium was also quite low at only 18% over yesterdayÆs closing price of Ps54. The bonds were offered with a premium of 18% to 27%, which compares with 35% on Indian software company Geodesic Information SystemsÆ $125 million CB last Thursday, and 30.18% on the $600 million exchangeable into Malaysian palm oil producer IOI Corp a week earlier. The Geodesic bonds did have a reset down to an 80% floor, however.

Unusually for Asian CBs, the bonds will also pay a 2.5% annual coupon, although the need for this may be at least partially explained by First GenÆs high dividend yield. The bonds have a five-year maturity, but can be put back to the issuer after three years for a yield to put of 7.25%. The yield was marketed in a range between 6.75% and 7.25%.

Assuming the bonds will be converted into equity û there is an issuer call after two years subject to a 130% hurdle to make sure the bondholders do that if the share price performs - the company has still achieved cheaper debt than that which will be refinanced, which justifies coming to market at a sub-optimal time.

ôIf you do need to raise money in the first half, the prudent thing is to go ahead now since there is no telling how the markets will look in another few months,ö the same source notes, adding that at least swap rates are at a four-year low.

As noted, JPMorgan provided no credit bid, but investors were guided to a credit spread of about 500bp. Other assumptions included a 5% stock borrow cost and compensation for dividend payouts that exceed a yield of 4.5%. Depending on the exact credit spread used, this gave a bond floor of about 94.5%-95% and an implied volatility of 25%-26%.
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