San Miguel Corp, the Philippine conglomerate whose businesses range from beer and food to oil, power and infrastructure, has launched a tender offer for its exchangeable bonds that mature in May 2014. The bonds, which are exchangeable into treasury shares held by the company, pay a 2% coupon and have an outstanding face value of $600 million.
The tender will be conducted through a Dutch auction, which means that the bondholders can offer to tender their bonds at whatever price they find suitable. However, the company has set a maximum price of 107.75 per bond. This means it may have to pay up to $646.5 million to buy back the exchangeable bonds.
In an announcement, San Miguel said the tender is part of a wider decision to refinance its existing financial obligations at “terms and conditions which are favourable and advantageous to the company”. Analysts noted that the strength in the peso makes this a good time for the company to buy back US dollar-denominated debt.
The deadline for the tender is next Tuesday, January 29. To give investors time to appraise and evaluate the offer, the company has suspended trading in its shares for six days from yesterday morning. This is a highly unusual move. Most tender or exchange offers involving equity-linked bonds take place while the stock is still trading.
However, one source noted that contrary to most other offers in Asia, which tend to involve CBs that are out of the money and trading well below par, the San Miguel EB was trading close to the exchange price and in line with parity of about 103 just before the tender offer. This means that changes in the share price affect the value of the EB quite a lot and by suspending the stock the company is also fixing the value of the tender.
In connection with the tender offer, the company is also asking the bondholders for their consent to change the terms of the clean-up call. Under the original terms, the company has a right to call the remaining bonds at par when only 10% of the issue is left outstanding. All it needs to do is to give the bondholders 30 days’ notice.
The company wants to change those terms to allow it to buy back the rest of the bonds when 25% remains outstanding. The new clean-up price will be the same as the tender price and it will also need to give only 10 days’ notice. Bondholders who accept the new terms will be paid a 1% fee, which could lift the total tender price to as much as 108.75.
The consent solicitation will pass if bondholders representing 75% of the outstanding bonds agree to the new terms. As usual, bondholders who decide to tender their EBs will also be viewed to accept the consent solicitation, which effectively means that if 75% of the bonds are tendered, the company will be able to take out the entire issue.
The EB, which was issued in April 2011 in connection with a concurrent $280 million equity issue, was bid at about 103.85 before the tender offer was announced yesterday morning, but spiked up to 108 during yesterday’s trading session. The current exchange price is 109.8, although that is set to be adjusted to 109.45 because of a cash dividend payment that has already been announced. The bonds are also subject to a quarterly reset in early February, which is expected to lower the exchange price to 107.44 — equal to the current floor price, according to a source.
Hence, it is possible that some bondholders will choose to exchange their EBs for shares instead of accepting the tender offer.
The initial response from bondholders was that the tender offer seemed quite fair, particularly since the increase of the clean-up call price means that it won’t be too punitive for investors who decide not to tender their bonds. If their bonds end up being subject to a clean-up call they will only have missed out on the 1% consent fee.
One source estimated that there are currently close to 100 investors who hold the San Miguel EB.
There was quite a lot of controversy surrounding the issuance of the EB. In terms of size it was the largest equity-linked deal out of the Philippines ever, but essentially it was only issued because the company was unable to raise enough money ― at the terms it wanted ― through a share sale.
To get the maximum effect on the free-float, San Miguel had initially planned to sell only shares, but when that turned out to be too much of a challenge the plan was revised to include an exchangeable bond at attractive terms. In the end, the company sold only $280 million of straight equity.
To ensure the company would still achieve its free-float objective, the EB was designed 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 share offer and represented a 28.1% discount to the latest market price of Ps153.
The company had initially set an indicative price range of Ps140 to Ps160, but this was lowered to Ps110 to Ps140 two days before the close of the international bookbuilding and the final price was eventually fixed at Ps110.
The EB had a three-year maturity, an issuer call after one-and-a-half years, and a quarterly reset after the first six months down to a floor of 80% of the initial exchange price, before dividend adjustments. The exchange price has been reset several times since then, and is currently close to the floor. The coupon and yield were both fixed at 2%.
Investors were not required to buy both the EB and the equity, but it was definitely encouraged. One source noted at the time that more than 95% of the bonds did go to investors who also bought the equity and of the 150 investors who submitted orders for the EB, less than 35 actually got allocated.
The bond was viewed as cheap at the time and the day after the pricing, it trading up to 103-105 as investors who failed to get allocated chased the bonds in the secondary market.
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.