The bond issue was arranged by JPMorgan and Merrill Lynch, who acted both as joint placement agents and as buyers of the bonds. Aside from the two investment banks, another four investment funds took part in the initial sale that was completed on Wednesday (December 6).
However, Merrill Lynch immediately turned around and sold its $25 million portion to a US investor, who had been prevented from buying outright from the company and JPMorgan was said to have sold part of its initial $55 million stake to two investors, bringing the total number of independent investors to seven. JPMorgan will retain the majority of its initial stake, according to a source.
None of the investors aside from JPMorgan and Merrill Lynch were identified.
The five-year bonds have no put option, will pay no coupon and even more significantly will provide no yield for the investors. This makes it a great deal for the issuer who will get cheap money straight away and will also see a boost to its equity capital once the bonds convert.
In a statement issued to the Hong Kong stock exchange yesterday, Galaxy said it intends to use 85% of the net proceeds û estimated at $235.15 million û to fund the expansion of its Cotai Mega Resort in Macau. The remainder will go towards working capital.
According to CB bankers, this was likely the first time a zero coupon, zero yield structure had been used for a convertible with a maturity as long as five years in Asia outside Japan. The aggressive structure was possible because investors are very bullish on the companyÆs equity story which is underpinned by rapid growth in Macau tourism arrivals and gaming revenues.
In return for the lack of yield, though, the investors secured a low conversion premium of 11.4% above last FridayÆs close of HK$8.40, which compares with an historic volatility of 26.5% over 30 days and 33.3% over 100 days. However, according to sources, the conversion premium was actually set at 20% above a reference price of HK$7.80, which reflected the fact that the investors other than Merrill Lynch and JPMorgan had been in talks with the company about deal structure for some time.
The last time the stock traded at $7.80 was on November 10, which suggests that the number of other investment banks that tried to pitch equity or equity-linked deals to the casino operator after its stock was suspended from trading early Monday did come to the table a bit late.
Whatever reference price you look at though, the initial conversion price will be HK$9.36 per share. This can be adjusted lower through a quarterly reset, subject to a floor of 79.5% of the initial conversion price if the share price doesnÆt perform. Unusually, the reset works in both directions, meaning the conversion price can be adjusted upward again if the share price picks up. It cannot go above the initial conversion price of HK$9.36, though.
If converted in full at the initial conversion price, Galaxy will need to issue 200 million new shares, which will account for about 6.1% of its existing share capital and about 5.7% of the enlarged capital.
The stock has had a good run in response to the opening of the Galaxy Starworld hotel and casino on October 19 and the share price closed at a record high of HK$8.48 on November 27. The stock had been suspended since Friday, but fell 2.4% yesterday in the wake of the bond issue. That left it up 87.4% year-to-date, which compares with a 26.7% rise in the Hang Seng Index.
However, Galaxy is still lagging fellow Macau casino operator Melco International, which has rallied 148% so far this year.
Despite the equity-heavy structure of the convertible bonds, both Standard & PoorÆs and MoodyÆs put GalaxyÆs casino-operating subsidiary Galaxy Casino on review for a possible downgrade. Both reviews also include the latterÆs $600 million straight bond that was issued in December last year.
S&P credit analyst Ryan Tsang said the placement of the companyÆs B+ rating on Credit Watch reflects ôthe heightened level of debt leverageö. He added that ôthe issue does, however, not add to the interest payment burden of either Galaxy Entertainment Group or of Galaxy Casino and it provides some financial flexibility to the group over the near termö.
MoodyÆs, which rates to stock B1, said that as part of the review, it will also consider changes in Galaxy's business plan, particularly alterations to construction and development commitments.
Galaxy Casino, which holds one of six concessions and sub-concessions for gaming activities in Macau, is aiming to boost its share of the former Portuguese colonyÆs $45 billion gaming market to 25% by the end of this year from 20% in August and 7% in the first quarter.
The 1,500-room Galaxy Mega Resort, which makes up the first phase of the companyÆs 4.7 million square foot development on the Cotai Strip, is scheduled to open in 2008.
In September, Macau gaming revenues jumped 37% to HK$4.5 billion ($578 million), while visitor arrivals rose 20% to 1.75 million û faster than the 15% gain for the year as a whole thus far, official data shows. In the first eight months of the year, MacauÆs gaming revenues totaled $4.25 billion, only slightly behind the $4.39 billion racked up by the Las Vegas Strip.
¬ Haymarket Media Limited. All rights reserved.
