Because of the transformational nature of that $750 million acquisition, which has been announced earlier, the company was able to achieve a quite aggressive pricing on the bonds despite the widespread downturn in Asian equity markets earlier in the day. This included a yield of only 0.6% on the shortest of the two tranches.
Part of the interest may stem from the fact that the company has not been on the radar screens of most international investors until very recently and even for investors who have come across it, the stock has been difficult to buy in the open market because of the limited liquidity. If the CB is fully converted, the company will have to issue new shares representing no fewer than 564 days worth of trading volume.
Guocoland saw its share price drop 2.0% to S$5 in yesterdayÆs trading, but the stock did have some room to drop given it had gained 21.4% in the previous three days. The stock is up more than 80% since early March.
The CB, which was arranged by JPMorgan and launched after the Singapore market closed, was split into two equal zero-coupon tranches of S$345 million. Both of them carry an upsize option of S$50 million, which could boost total proceeds to S$790 million ($522 million).
Both tranches have a five-year maturity, but tranche 1 can be put back to the issuer after three years, which gives it a shorter effective maturity. Tranche 1 has no put option. Given the difference in duration, they do offer a different yield, but otherwise they are identical to one another. This includes the conversion premium, which was fixed at 25%, or at the low end of the indicated 25% to 30% range.
The issuer has the option to reset the conversion price at any time down to a floor of 70%. The company can also force investors to convert into equity after two years through a mandatory conversion option, suggesting the company is keen to get more equity on its books.
The yield was also set at the wide end of the range, but observers say this was still aggressive. In fact, at 0.6% the yield on the three-year tranche was the lowest ever achieved on a CB by a Singapore-listed issuer.
This tranche was marketed with a yield range of 0% to 0.6%, while the five-year tranche 2 was offered to investors with a yield between 1.15% and 1.9% and priced at 1.9%.
ôItÆs a good outcome for the company û either it will sell shares at a huge premium to where the share price was three months ago, or they will have a cost of debt at 0.6% for three years,ö notes one observer.
Tranche 1 was also priced with an implied volatility of 31.9%, which equals a 4 percentage point premium to the 260-day volatility of 27%, which can only be described as aggressive. Given the sharp rally in the share price in the past seven weeks, however, the 100-day volatility is higher at just under 35%. The bond floor was set at 91.4%.
Tranche 2 has a bond floor of 90.1% and an implied volatility of 31.5%.
The bonds were quoted just below par at 99.75% to 100% in the gray market, which indicates investors feel the company didnÆt leave much on the table.
The underlying assumptions include a credit spread of 90bp over Sibor on tranche 1 and 115bp over for tranche 2. The bookrunner was said to have provided S$100 million worth of credit default swaps to back them up and about half of that was expected to be taken up. The stock borrow cost is 5% and there will be dividend protection according to an increasing scale that will allow for a gradual increase in dividend payouts as the company grows. The scale starts from a dividend of S$0.09 per share in the fiscal year to June 2007, which corresponds to a 1.8% yield at current prices.
The bond investors will also be compensated to some degree for a rights issue that was announced yesterday but still needs shareholdersÆ approval before it can go ahead.
As the two tranches were so similar, they werenÆt separated for the purpose of bookbuilding and investors were allocated an equal amount of both tranches. The final book included about 60 names and was multiple times covered even though the deal was open for only about three hours, according to the sources.
The Beijing property project comprises 106,000 sqm of land in the centre of the city that will be developed into a retail, office, hotel and residential complex with up to 600,000 sqm of space. Including the development cost, the entire deal is valued at 1.3 billion.
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