SM Investments raises $250 million from unhedgeable CB

The Philippine investment holding company attracts good demand from outright investors, but doesn't immediately exercise the $50 million upsize option.
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The SM group is the Phiplippines' biggest mall operator
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<div style="text-align: left;"> The SM group is the Phiplippines' biggest mall operator </div>

SM Investments Corp (SMIC) on Thursday last week proved that it is possible sell convertible bonds in Asia that aren’t hedgeable. The Philippine investment holding company was able to raise $250 million by tapping primarily outright and long-only investors and did so at a time when its share price was trading at a record high.

By comparison, the CBs issued by Taiwan technology rivals Pegatron and Wistron in January failed to gain much traction with investors until the banks were able to offer asset swaps upfront that covered 80% to 100% of the respective base deals.

It clearly helped that SMIC is a well-liked investment group with a number of high-quality companies in its portfolio, including controlling stakes in department store operator SM Prime and Banco De Oro. The group also owns a number of unlisted companies in the property, hotel and retail sectors, making it a direct play on the performance of the Philippine economy. It is controlled by the Sy family, which is viewed to be extremely averse to diluting its stake in the holding company and, as a result, SMIC is a rare issuer both in the CB and straight equity market. This was only its second CB after a debut issue in 2007.

However, the possibility of raising equity at a significant premium to the all-time high was clearly too tempting an opportunity to let slip by. In an announcement on Friday, the company referred to the deal as a landmark transaction and said it provides it with attractive, low cost financing.

The deal was also well-timed in the sense that the Philippines has been attracting a lot of interest from long-only funds during the past couple of months. Thursday was a particularly strong day in the market with large-cap stocks like property developer Ayala and telecom operator PLDT posting significant gains. The benchmark index rose 2.3% to a multi-year high and opened the door not just for SMIC, but for a group of affiliated shareholders in JG Summit who took the opportunity to sell part of their holdings through a $125 million block trade on the same night.

And with the local stock market being relatively illiquid, capital markets transactions offer an opportunity for funds that want to increase their exposure in meaningful sizes.

The SMIC CB has a five-year maturity with a three-year put and was offered with a coupon between 0.625% and 1.625%, and a back-ended yield-to-put of 1.875% to 2.875%. A source noted that this structure was used to allow the company to keep the annual costs down during the life of the CB.

It was also marketed with a conversion premium of 20% to 30% over Thursday’s volume-weighted average price of Ps651.205. The decision to price over VWAP was made as the share price soared 8.2% to a record close of Ps677 during the session, but means that the actual conversion premium over the close was slightly lower. The issuer can call the bonds after three years, subject to a 130% hurdle.

Given the recent share price rally — the stock had gained 30% since mid-December — it came as no surprise that the deal was priced at best-terms for investors, resulting in a coupon of 1.625%, a yield of 2.875% and a conversion premium of 20%, or 15.4% if compared against the closing price. The premium translates into an initial conversion price of Ps781.446, which is significantly above analysts’ 12-month target price of about Ps693. Of the 11 analysts who cover SMIC, according to Bloomberg, six have a “buy” recommendation on the stock and another three have a “hold”.

But despite the challenging conversion price, investors were quite keen to participate in the deal and many of the outright investors submitted large orders, one source said. A few hedge funds also came into the deal even though there is no stock borrow in the Philippines and Philippine banks have no appetite to provide asset swaps. This means investors cannot hedge either the equity option or the credit, but rather will have to have some conviction that SMIC will continue to grow and that its share price will continue to head higher.

SMIC said the deal attracted high quality investors from across Asia and Europe and according to a source the bonds were split between 35 investors.

However, the bookrunners didn’t exercise the $50 million upsize option, which suggests that the demand was sufficient, but not excessive. The leads still have 30 days to exercise the option though, so if the CB trades well in the aftermarket SMIC may still be able to push the total proceeds to $300 million. The company said it will use the money to refinance existing debt and for general corporate purposes.

After being offered slightly below par in the grey market during the bookbuilding, the bonds edged higher on Friday and by late afternoon were bid at about 100.25. This came as the share price dropped 3.8% to Ps651.

The deal was marketed by the leads at a credit spread of Libor plus 350bp. The stock borrow cost was assumed at 5% and investors will be compensated for dividend payouts that exceed 30% of net profit. As this is pretty much what the company pays now, it seems any such adjustments will be minor though.

At the final terms, this resulted in a 95% bond floor and an implied volatility of 20.5%, a source said. That compares with a historic vol of about 33%-34%.

 The deal was arranged by Citi and J.P. Morgan.

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