Melco PBL issues $200 million exchangeable

Gaming operators Melco and PBL issue an exchangeable bond via a special purpose vehicle to fund a buyback of shares in their listed joint venture.
Melco International Development Limited and Publishing and Broadcasting Limited (PBL) issued a five-year $200 million exchangeable bond on Monday via sole lead manager Merrill Lynch. The transaction priced amid turbulent markets following a global equities sell-off on Thursday and Friday last week and in a difficult debt environment.

The deal priced with a 2.4% coupon and attracted $300 million in demand. Exchangeable at a premium of 40% over a share price of $12.28 (the reference price) starting one year from the date of issue, the offering includes a three-year put and is non-callable for three years. The transaction closed at 98.5.

The funds raised from the transaction will allow Melco International and PBL to buy back shares of Nasdaq-listed Melco PBL Entertainment, which is currently 82.8%-owned by both companies. The remaining stake was sold via an initial public offering last December at $19 per share, and it has recently traded significantly below issue price. The shares dropped to $12.25 over the course of the year, after reaching an earlier peak of $23.

This buyback programme will come as a relief to investors, who can now look forward to a gain in the share price.

It also allows Melco PBL's owners to buy back its shares at a significant discount, as Morgan Stanley analyst Rob Hart explains: ôThis is a great deal for Melco International. Effectively the company sold stock at $19 at the end of last year, and is now buying it back at $12.25.ö

However, despite a positive outcome for the issuer, Merrill Lynch failed to clear the transaction at par. In addition, sources state that investors rejected an initial 42.5% premium, leading Merrill Lynch to revise this to 40%.

Sources commented that a sole PBL guarantee may have been introduced to enhance the credit-perception of the bonds, enabling the low yield and coupon. The guarantee structure envisages an initial joint guarantee by Melco International and PBL, converting into a sole guarantee by PBL by end 2007.

The transaction gained substantial momentum as books closed, pushing the stock price up by 5.05% to $12.90. In contrast, the Dow Jones and Nasdaq markets were generally flat.

This development allowed the transaction to close at 98.5, with the bonds opening yesterday morning at 99.5. They were trading last night at 99.25-99.75.

ôSince a share buyback generally signals a positive view of a company, existing equity holders and some investors who bought the exchangeable bonds opted to buy further Melco PBL shares and drove the share price up," says one source. As such, the issuer achieved at least one of its objectives.

ôIt was a good outcome for the issuer, but perhaps sub-optimal for Merrill Lynch,ö says one banker who speculated that the US bank may have booked a marginal loss on the deal. Other sources comment that after taking into account the fees as sole lead on a structured product placement, Merrill Lynch potentially came out flat.

Regardless, Merrill Lynch - who was not mandated on Melco PBL's December 2006 IPO led by Credit Suisse, Citi and UBS - succeeded in adding a new name to its client roster. Meanwhile, parents Melco International and PBL should be satisfied with the bank's achievement on behalf of their subsidiary in a difficult market environment.
¬ Haymarket Media Limited. All rights reserved.
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