Golden Agri-Resources puts CB on ice

Turbulence in the equity and debt markets persuades the palm oil company to hold its $300-400 million five-year convertible bond.
Singapore-listed Indonesian crude palm oil company Golden Agri-Resources is holding its estimated $400 million convertible bond in the face of weakening sentiment around the region. The decision follows spectacular falls in major equity markets last week, followed by an unconvincing recovery on Monday.

Citi and BNP Paribas Peregrine are global co-ordinators on the deal and UBS has a joint book role.

This is the second deferral since last Wednesday-Thursday, when the deal was pushed back to this week, with pricing expected to occur Monday.

The global co-ordinators are hoping that a window might open up over the next two days, allowing the company to go ahead with the deal. This would be the last opportunity to issue ahead of August 15, when the companyÆs quarterly results are announced. Singapore corporate governance regulations advise companies not to raise capital in the two weeks leading up an earnings announcement.

After August 15, another delay might set in because of the need to incorporate the new figures in the sales document.

ôWe had a roadshow and investors really bought into the equity part of the story. We donÆt want to see that compromised by weaker global credit markets,ö says one source, explaining the circumstances surrounding the change in plan.

In view of the macro volatility, itÆs reported that advisors finally suggested a $300-400 million five-year convertible bond yielding 6%-7% with a conversion premium of 25%-30%, along with multiple resets on the conversion price, according to one specialist.

However, this was reportedly below what the issuer was expecting, given the more favourable conditions just a few weeks ago.

ôItÆs perfectly understandable that the company was reluctant to drastically revise its expectations downwards,ö says a source.

MoodyÆs, the rating agency, was not disturbed by the news. ôGolden Agri may consider other methods of financing these projects. We will need to assess the impact of alternative sources of financing. To the extent that the financial profile does not materially change, it may not impact the Ba3 rating,ö MoodyÆs analyst Virginia Chung told FinanceAsia.

Observers say that the recent affirmation of the companyÆs Ba3 rating was a vote of confidence, given the increase in leverage the CB would have entailed.

Golden Agri was supposed to use the cash to finance the acquisition of shares in PT Sinar Mas Agro Resources and Technology (PT Smart), as well as funding Golden AgriÆs capex plans and working capital needs. This may still go ahead as the company is æfar from being cash strappedÆ, according to a source û not surprising, given the favourable trend in palm oil prices.

Golden Agri is increasing its stake in PT Smart from 72% to 95% and has already spent $70 million to bring its stake to 84%.

Given Golden AgriÆs healthy earnings ($470 million last year), it should still be able to finance the share acquisition out of its own pocket, especially given a capital raising operation in April in Singapore this year which brought in $463 million, of which some $300 million has been spent on refinancing and new plantings.

The background to the postponement is the volatility in the equity and the debt markets û with equity being finally dragged down by the impact of the turbulent credit markets.

ôIt all went wrong last week. Companies that did CB deals before last Thursday got away with it, but the fall-out in the debt market caught up with many major equity markets on Thursday and Friday. And credit markets have since deteriorated even further,ö says a source.

The beauty of CBs is that they are hybrid debt and equity structures. Prior to late last week, equity markets were still performing, despite weaker credit markets, which enabled some CBs to go ahead. But with both credit and equity markets down, investors were reluctant to get involved.

ôThere is nothing that could be done on this deal to make it appeal to investors. Volatility is too high for any kind of deal, not just Golden Agri,ö says one source.

Another banker said that twice in the past 12 months there have been major corrections, only for the market to race to new highs. However, he sees the recovery on Monday as being neutral rather than bullish.

ôWe have to see both equity and debt markets recovering,ö he says.

Golden Agri's stock price has performed very well, gaining 117% year-to-date. It closed down fractionally on Monday at S$2.59 ($1.71). This time last year, the share price was languishing at S$0.71. The Singapore Straits Times Index lost some 200 points last week, but put on 1% on Monday to close at 3,526 points. If markets recover further, the deal could still go ahead.
¬ Haymarket Media Limited. All rights reserved.
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