Investors tender only 43.8% of San Miguel’s exchangeable bond

The company reduces the EB issue to $332 million, but withdraws the consent solicitation which was seeking to make it easier to do a cleanup call.

San Miguel Corp didn’t get a sufficient response to the tender offer for its exchangeable bonds (EBs) due May 2014 and the accompanying consent solicitation to allow it to buy back the entire issue — as it was likely hoping to do. The bonds had a face value of $600 million when they were issued in April 2011 and had about $591.2 million left outstanding before the launch of the tender.

The EB isn’t distressed — indeed, it was close to being in the money when the offer kicked off — but has fallen short of the company’s initial objectives of having it convert into equity relatively quickly.

In a statement issued Friday, the company said that $259.2 million worth of bonds, representing 43.8% of the outstanding amount, were tendered through a Dutch auction and will be bought back at a price of 107.75 per bond. The price is equal to the maximum price it set before launch and puts the cost of the repurchase, including accrued interest, at $280.6 million.

The Philippine conglomerate whose businesses range from beer and food to oil, power and infrastructure, also said the consent solicitation had been withdrawn. It didn’t explain why, but a source said the outcome wouldn’t have enabled it to achieve what it set out to do, namely to buy back the rest of the bonds that would be left outstanding after the tender. And therefore it probably didn’t see much point in proceeding.

The source said bondholders representing only 69% of the outstanding issue had agreed to attend a bondholders meeting to vote on the company’s proposed amendment of the EB terms, while it would have needed 75% for the vote to be valid. It didn’t help that 82% of those attending intended to vote yes.

The company could have decided to adjourn the meeting for two weeks, after which it would have needed bondholders representing only 25% of the issue to attend in order for the decisions to be legally binding. So, technically it could have pushed through the amendments.

San Miguel wanted to change the terms of the clean-up call to allow it to buy back the rest of the bonds when 25% remains outstanding, from a current hurdle of 10%. It also offered to increase the clean-up price from par to the same price as the final tender price, ie 107.75.

But since more than 55% of the original issue, or $332 million, will remain outstanding after the tender, it wouldn’t have been able to exercise such a clean-up call immediately anyway, even if it had gone ahead and pushed through the amendments.

The tender offer raised some eyebrows in the market since a key intention with the original capital-raising in 2011 was to sell new shares to improve the free-float. It was only when it was unable to raise enough money ― at the terms it wanted ― through a straight equity sale that the plan was revised to include exchangeable bonds as well.

For that reason, the EB was structured to be equity-like and to maximise the possibility of conversion. As a result, it came with a highly favourable premium of 25% that was set over an already low reference price of Ps110. The latter was equal to the price of the concurrent $280 million share offer and represented a 28.1% discount to the latest market price of Ps153.

The three-year bonds, which are exchangeable into treasury shares held by the company and pay a 2% coupon and yield, also came with quarterly resets down to a floor of 80% of the initial exchange price (including dividend adjustments) and an issuer call after one-and-a-half years. The initial exchange price of Ps137.50 has been reset several times since then and is currently at Ps109.45. The bonds are subject to another reset this month, which will lower the exchange price to Ps107.44, according to a source.

However, San Miguel’s share price hasn’t performed as well as expected and while it has traded above the exchange price at times, it hasn’t done so consistently. Also, in order to maximise their profits, investors typically want their bonds to trade at least 20% to 30% above the conversion or exchange price before converting into shares. Consequently, less than $9 million worth of San Miguel EBs have been converted so far.

The shares closed at Ps105.90 on January 22 before they were suspended for six days to carry out the tender. They jumped 5.8% to Ps112 when they resumed trading on January 31 and moved up to Ps112.50 on Friday. Those gains were partly a delayed response to the 2.7% rise in the benchmark Philippine index while San Miguel was suspended, partly an adjustment to the fact that EBs equal to almost 5% of the outstanding share capital will be bought back as a result to the tender.

Sources noted that the market backdrop has changed since the EB was issued, and the availability of cheap funding in the international bond market at the moment would have made it tempting for the company to free up balance sheet capacity to lock-in cheap long-term funding. Particularly since the EB had only a bit more than one year left until maturity. Analysts said that the strength in the peso also makes this a good time for the company to buy back US dollar-denominated debt.

The maximum tender price set by the company was based on a trading price of about 103.85 before the offer was announced, adjusted for the upcoming reset and including all the remaining coupon payments. By most standards, this was a generous price and clearly structured to convince bondholders to tender. Bondholders who accepted the consent solicitation as well would get an additional 1%, bringing the total tender price to 108.75.

The consent fee will not be paid now that the consent solicitation has been withdrawn.

The fact that some bondholders chose not to tender could suggest that they expect the share price to rise in the coming year, giving them the opportunity to convert. Investors could have taken the money for the EB now and used it to buy shares in the market, although the San Miguel stock is not that liquid and hence may be difficult to buy in sufficient amounts without pushing up the price.

According to one source, two outright investors with relatively large positions in the EB were also holding out in the hope that the company may increase the tender price somewhat.

The market price of the EB increased to 108 once the tender offer was announced, but the company didn’t budge on the maximum price.

The tender offer was arranged by Deutsche Bank and Standard Chartered.

Standard Chartered was also a joint global coordinator and bookrunner for the EB and the international portion of the equity offering in April 2011 together with Credit Suisse. Goldman Sachs and UBS were joint bookrunners.

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