Noble Group issues CB with 65% conversion premium

The raw materials supplier raises $200 million from the offering, which comes as the share price has risen 54% year-to-date.
Noble Group has raised $200 million from a convertible bond, which clearly shows investors still have an appetite for high premium offerings despite the set-back in the secondary market for several of the more recent deals.

In fact, the Singapore-listed supplier of raw materials and commodities managed to pull off the highest premium ever for an Asian CB outside of India at 65%. That it was able to do this even after the stock has run up close to 50% in the past three months, is partly a testament to the experience of Citi and JPMorgan, which were joint bookrunners on the transaction. The pair gathered enough interest for the issue û which has an effective maturity of four years - to ensure it was multiple times covered in just over two hours, albeit at quite an attractive valuation from the investorsÆ point of view.

However, what really would have made a difference here is the fact that Noble is a good credit with an outstanding high-yield bond and liquid trading in the credit default swaps market. This means the bond floor, which at the final terms came out at 96.4%, is ôrealö and will give proper downside protection to the bondholders. The bookrunners were said to have provided a credit bid of $70 million at 180bp over Libor to put additional weight behind their credit assumptions.

Given the challenging premium, which was fixed at launch, it came as no surprise that the yield was priced at the top of the 5.4% to 5.9% range. Especially since the bond holders also had to accept the inclusion of an early issuer call after just 2.5 years, subject to a 125% hurdle.

The bonds have a seven-year maturity, but can be put back to the company on the fourth anniversary at 126.186% to achieve the 5.9% yield. The bonds will pay no coupon in the meantime and were issued at par. At the base size the CB will account for about 7.4% of the pre-deal market cap and about 28 days trading volume if fully converted.

There is also a $50 million greenshoe that may boost total proceeds to $250 million.

The premium was fixed over yesterdayÆs (May 15) volume weighted average price of S$1.684 for a conversion price of S$2.779. The VWAP was almost identical to the closing price of S$1.69, meaning there is no short-cut to the 65%.

Before this, the highest premium used on a convertible in Asia outside India was 54%, which was achieved by TaiwanÆs Chunghwa Picture Tubes on a $214 million offering in November 2004. The only company to have surpassed that, according to a banker, is IndiaÆs Glenmark Pharmaceutical which pulled off a 71% premium. At only $30 million, that deal was tiny, however.

At least five banks were said to have pitched for the Noble CB - four of them quite aggressively - which can be seen as a sign that the banks too arenÆt shying away from deals where the issuer is requesting high premiums.

Sources say about 40 investors bought into the deal, including a subset of the usual buyers of Asian CBs. The majority of the buyers were people who were already familiar and comfortable with the underlying credit, but the deal also attracted investors who believe that the share price will continue to go up, supported by NobleÆs ongoing business diversification and acquisition strategy.

ôThere is strong momentum in the stock and given that this is a good credit with a real bond floor, itÆs a good option to have,ö says one source close to the transaction.

Aside from the credit spread at Libor plus 180bp, the underlying assumptions included a 5% stock borrow cost (itÆs possible to short the stock, but the borrow is very illiquid) and dividend protection that allows for a gradually rising payout ratio, starting from 27.5% this year and increasing to 62.7% by 2014. This yearÆs ratio equals a divided yield of 1.5%, based on the current share price.

The implied volatility was just under 32%, which compares with a 90-day volatility of 49%. The volatility has been picking up over the past five months as the share price has been rising steadily.

YesterdayÆs close of S$1.69 is only 8 Singapore cents below the all-time high close of S$1.77, which was reached on May 7, and translates into a 54% gain year to date. This compares with a 16% gain in the Singapore benchmark index.

The gains have been driven by a pick-up in sales as demand for all sorts of commodities - from metals and energy to food products like wheat, corn and soybeans - continues to increase in China and India. Last week, Noble reported a 25% rise in its first quarter net profit on the back of a 22% increase in sales volumes.

In an attempt to secure a steady supply of raw materials that will allow it to boost its share of the global trading of these products, the company has also been diversifying upstream through the acquisition of various assets, including soybean crushing plants in China and a sugar and ethanol mill in Brazil.

In a conference call with analysts and reporters following the first quarter results, Chief Operating Officer Ricardo Leiman said Noble now controls about 10% of soybeans shipped from South America and more than 10% of the soybeans crushed in China and ranks as the worldÆs largest soybean importer.

In a ratings advisory issued yesterday, MoodyÆs noted, however, that the companyÆs improved operating performance in the last six months hasnÆt yet resulted in a strengthening of its credit profile as the company has taken on more debt to fund the increasing working capital requirements as well as its fixed-asset investments.

"Noble continues to deliver high growth rates with the 2007 first quarter revenues rising 47% compared to the first quarter 2006, yet the company needs to demonstrate it can continue to grow its earnings and cash flow while limiting additional debt to fund its working capital requirement," says Elizabeth Allen, Moody's lead analyst for Noble. "Failure to do so would pressure the ratings."

As the proceeds from the CB will be used partly to re-finance short-term debt, MoodyÆs said the bonds are not expected to have an impact on the overall debt levels and as a result it affirmed NobleÆs corporate and senior unsecured bond ratings at Ba1.
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