Khazanah Nasional Berhad completed Malaysia's largest ever equity-linked deal yesterday (December 15) with a $414.5 million exchangeable into PLUS Expressways. Under the lead management of CIMB and JPMorgan, the deal was priced at the mid-point of its indicative range and was described as fairly priced and well executed by non-lead bankers.
Given that PLUS is a relatively low volatility stock with no stock borrow, investors were most fixated on the yield and strength of the bond floor. Final terms comprised an issue price of par, zero coupon and five-year maturity with a put in year two at 103.957% and redemption at 110.189% to yield 1.95%. The yield was marketed at 1.55% to 2.05%.
The exchange premium was fixed at 18% to the stock's M$2.67 close, compared to a range of 15% to 22%. There is also a call option after two years with a 130% hurdle.
Underlying assumptions comprise a bond floor of 96.8%, implied volatility of 21% and theoretical value below par. This is based on a credit spread of 20bp over Libor, no stock borrow, 2.8% dividend yield and 100-day volatility of 18.3%.
Because the bond floor was so high and the focus was on the credit, specialists say investors were less concerned about the fact that implied volatility has come through historic levels. The order book is said to have closed two-and-a-half times covered with participation by 70 accounts of which 70% came from Europe and 30% from Asia.
Specialists add that one of the most notable aspects of the trade is the incredibly low credit spread at which Khazanah is currently trading. Despite a theoretical six to seven notch rating differential to Singapore government investment arm Temasek, the two are said to be trading on top of each other in the CDS market. Temasek attained a triple-A rating from both Moody's and Standard & Poor's earlier this year, while Khazanah has the implied Malaysian sovereign rating of Baa1/A-/BBB+ (Fitch).
On full conversion, the exchangeable represents a 10% stake in PLUS, which currently has a 25% freefloat. Year-to-date the stock is up about 4.5%, although it has performed strongly since the beginning of June, rising about 20%.