The pricing of three convertible bond issues on Thursday last week offered further proof that the Asian CB market has indeed sprung back to life after a very slow first half of the year.
The deals, led by a $400 million offering by Singapore-listed Golden Agri-Resources, came after four CBs were completed in the region in August and bring the year-to-date equity-linked issuance to $6.8 billion. This still leaves a big gap to the $19.7 billion raised in 2011 as a whole, but $1.1 billion of issuance in just five weeks does suggest a return of confidence that bodes well for the next few months.
CB bankers confirm that the level of interest in the product has changed in the past month and say they have been getting a lot of inquiries from potential issuers lately. “Issuers realise that the first-movers in particular can capitalise on the renewed interest, which is why we saw three deals in one day,” one banker said.
Two of last week’s deals were quite small — a $70 million credit-enhanced deal by Amtek India and an S$80 million ($64 million) sukuk CB by Sabana Shari’ah Compliant Industrial Real Estate Investment Trust — but at $400 million, Golden Agri was the largest CB in Asia ex-Japan so far this year, which suggests that the market is getting deeper.
Singapore-listed Golden Agri is the world’s second largest palm oil plantation company with a market cap of about $7 billion. It is a highly liquid stock and has enough stock borrow available in the market to cover a CB of this size. However, the demand was still not overwhelming — one source said the deal was approaching 1.5 times covered — and in order to ensure the bonds traded well in the aftermarket, the four bookrunners chose not to exercise the $100 million upsize option, capping the size at $400 million. The terms were also fixed at the investor-friendly end, although the indicated premium in particular was more aggressive than on the other recent CBs.
The deal launched at about 11am Hong Kong time on Thursday after the stock was suspended from trading, although the bookrunners did wall-cross (or sign up indicative orders from) a handful of outright investors the night before to ensure good momentum at launch. According to one source, none of the investors who were approached pre-launch said no to the deal.
The Reg-S bonds have a five-year maturity, but can be put back to the issuer after three years at par. There is also an issuer call after three years, subject to a 130% hurdle to help force conversion if the share price performs. The bonds were offered with a coupon and yield of 2.25% to 2.5% and a conversion premium of between 28% and 32% over Wednesday’s close of S$0.695.
The coupon and yield was fixed at 2.5% and the premium at 28% for an initial conversion price of S$0.89 — some 12% above this year’s high of S$0.795, which it reached in early April. However, the last time Golden Agri traded at S$0.89 was before the onset of the global financial crisis in the summer of 2008.
The bonds were marketed with a credit spread of 500bp, a stock borrow cost of 50bp and a dividend yield protection level of 1%. At the final terms this gave a bond floor of about 92% and an implied volatility of 22%. The latter compared with a 260-day historic vol in the low 30s.
Sources said the demand was split roughly 60-40 between hedge funds and outright investors and had a slight overweight towards Asian accounts. Orders out of Europe were supposedly boosted by a number of orders from Swiss private bank clients. The order book was kept open until for five hours, to 4pm Hong Kong time.
Golden Agri’s share price fell 4.3% to S$0.665 on Friday amid heavy turnover, which was in line with an estimated stock skid of 4% to 5%. This helped the CB to hold around par for most of the session and when one large order came in late in the Asian afternoon, the bid was pushed up to 100.25. The share price was up 1.5% yesterday, while the CB was largely unchanged
Observers viewed the Golden Agri CB as a fairly opportunistic fund-raising, particularly since the company didn’t provide a specific use of proceeds, saying only that the money will go towards potential future acquisitions, working capital and other general corporate purposes. However, the company first intended to issue a CB in 2007, but was forced to abandon its plans when the market deteriorated sharply. So, the idea of a deal didn’t exactly spring up over night.
The day after the transaction Moody’s upgraded Golden Agri’s credit rating to Ba2 from Ba3, noting that the CB, together with a Rp3 trillion bond programme announced by its subsidiary, PT Smart, in June “should put the company’s debt maturity profile on to a sounder footing”.
The company has significant funds on hand, which the rating agency expects it will spend on enlarging the group’s downstream operations and improving its logistics capability to capture more contribution from across the crude palm oil (CPO) business chain. It will also support on-going planting programmes, including its interest in a 220,000 hectare plantation development in Liberia.
“While commodity price volatility is always a concern, we draw comfort from palm oil’s competitiveness as a vegetable oil and the growing global demand for vegetable oils and their derived consumer products, chemicals and fuels,” Alan Greene, a senior credit officer with Moody’s, said in the ratings notice.
Golden Agri has a total planted area of 457,000 hectares, all of which is located in Indonesia. Its integrated operations are primarily focused on the production of palm-based edible oil and fat. The company, which was founded in 1996 and listed on the Singapore Exchange in 1999, also has integrated operations in China, including a deep-sea port, oilseeds crushing plants, and production facilities for refined edible oil products and other food products such as noodles.
Separately, Singapore-listed CapitaCommercial Trust (CCT) last week closed the tender offer for its outstanding 2% convertible bond, which was set to mature in May 2013 and had S$146.75 million still outstanding. The tender was launched in connection with the sale of S$175 million of new 2.5% five-year CBs in mid-August, and according to a source, the response was strong enough that the company will be able to exercise a clean-up call for the remainder.
Key to the success rate, the source said, was the fact that the arrangers actively approached a number of private banks to ensure the small-scale bondholders were aware of the tender and had the option to sell the bonds back at the same level as the larger investors. The combination with a new issue also helped drive the tender, and some investors did swap into the new bonds.
The clearing price for the tender was set at 111.30, which equalled a slight premium versus the redemption price of 110.66 and also versus the clean-up call, which will be done at a price of 109.37.
This meant that the premium versus the redemption price was less than 1%, well below the average 6% premium that has been paid on Asia-Pacific CB tenders since 2008. Despite that, the take-up rate was significantly above the average rate of 30% in the same period, the source said.
The tender offer was arranged by Credit Suisse, while Credit Suisse and J.P. Morgan were joint bookrunners for the new CB issue.