IOI Corp opens the equity-linked market for 2008

The upsized $600 million exchangeable attracts strong demand, allowing the yield to be fixed at the tight end.
IOI Resources last night became the first company globally to issue equity-linked bonds in 2008 when it launched and priced a highly anticipated exchangeable into Malaysian palm oil producer IOI Corp.

While undoubtedly helped by the rising palm oil prices and the fact that investors have made money on two previous exchangeables into IOI, the demand was nevertheless impressive and suggests investors are ready for more CBs. While the credit environment hasnÆt changed much since the significant widening at the end of the third quarter, investors and issuers are now coming to terms with the fact that spread levels may have been too tight before and that current levels may be the new reality. Instead they have started to focus on high volatility, which is something CB investors like and want exposure to.

According to sources, most CB banks have a pipeline of two to three issues that are ready to come to market and after the strong reception for IOI there ought to be little holding them back. The fact that there are still doubts about whether there will be any issuance in the high-yield bond market soon, also argues for more CBs and EBs as issuers look for alternative fund raising routes.

ôAway from the high-yield market, the first option for these companies is a CB and we will see some issuers opt for this even though it could mean some dilution,ö says one banker.

The IOI bonds were launched at an initial size of $500 million but after attracting about $3 billion worth of demand, the upsize option was exercised in full for a total deal size of $600 million. About 120 investors participated in the deal, many of whom bought on an outright basis. The bookrunners were also able to push the yield all the way to the tight end of the 1.25% to 2.25% range, which is significantly lower than the 3% IOI achieved on its previous $370 million exchangeable in December 2006. The exchange premium was fixed at launch at 30.18% over yesterdayÆs close for an exchange price of M$11.

The implied volatility was 38%, which according to one source, should make this one of the most aggressively priced deals in Asia û which is perhaps not what would be expected from the first deal of the year. According to one source, even capping the implied vol at 35% gives a fair value of 98.8%, suggesting the bonds were on the expensive side. Like the rest of the market, the stock has become much more volatile in recent months, however. The IOI exchangeable twelve months ago had an implied volatility of 26%, a month ago the stock was trading at a volatility of 35%-40% and right now it is above 40%.

The pricing and the demand shows that the company - and Citi as the sole bookrunner - made the right choice not to go ahead with this deal in December even though everything was ready. By waiting, they have been able to capture the positive momentum in the palm oil sector that has been triggered by crude oil prices touching $100 per barrel last week.

The company had the luxury to wait for the right opportunity as it had no specific use for the money raised. According to the term sheet, IOI Resources intends to lend all of the net proceeds to IOI Corp and its subsidiaries to be used for capital expenditure, investments and acquisitions as well as for working capital and other general corporate purposes.

The bonds, which are guaranteed by IOI Corp, have a five-year maturity but can be put back to the issuer at the third anniversary. There is also an issuer call after two years, subject to a hurdle of 130%. The bonds will pay no coupon and were issued at par.

Citi provided no credit bid, but guided investors towards a spread of 80 to 100 basis points based on callable credit default swaps available in the market. The company also bought itself some additional flexibility by allowing for a dividend payout ratio of 80% without having to compensate the bond holders. This compared to a 50% payout ratio on the previous EB. Other assumptions included a 5% stock borrow cost, although there is limited borrow available. This gave a bond floor of 90%.

IOIÆs share price has more than doubled since the previous exchangeable in December 2006 and is currently trading at record high levels. It closed at M$8.45 yesterday after falling 0.6% on the day,

Aside from palm oil, IOI Corp also manufactures oleochemicals and specialty oils and fats and is active within property development and investments through a subsidiary.
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