SM Investments last night raised $270 million from a convertible bond issue that benefited both from the scarcity of Philippine paper and the strong name of the issuer.
The deal, which was increased from an original base size of $200 million, was the first fully marketed CB by a Philippine issuer since 1996 and the largest since JG Summit completed a $260 million deal in 1993. It was also priced off a share price that has rallied 76% in the past five months and was within 4% of the record close that it hit earlier in the week. Unusually, the share price has even gained 22% since the bond issue was first flagged to investors in mid-January.
Citigroup and Macquarie were joint bookrunners for the transaction, which was launched mid-afternoon Thursday after the close of Philippine trading and completed in the early evening after the bookbuilding was accelerated.
The final size was expected to end up at $300 million as the $30 million upsize option (increased from $25 million at the original size) was “highly likely” to be exercised barring a massive negative event, sources said. They based this on the size of the demand, which was said to have exceeded $2 billion, or more than 7.4 times the base size of the offer.
The order book contained “well over 100 investors” with a broad participation from the UK, Europe, Asia and offshore US accounts, according to sources.
This overwhelming interest allowed the bonds to be priced at the very tight end of an already aggressive yield range of 3.5% to 4.5%, which marks the lowest yield ever for a Philippine CB. It is also about 200 basis points below the swaps curve at that level, which means investors would have received a better return had they put the money in the bank.
The aggressive range allowed the bookrunners to price the deal within the terms they offered in a hotly contested pitching exercise just before Christmas even though the share price has risen about 20% since then. Citigroup and Macquarie teamed up for the pitch to make the most of their separate expertise with Citi being one of the most active and accomplished arrangers of CBs in Asia, while Macquarie has a strong relationship with the Sy family that controls SMIC. This was the sixth transaction the bank has arranged for the group since November 2004.
To be able to price at that level was likely a function of the scarcity value, but it was also helped by the fact that SMIC is a well-known name with a top quality management.
Indeed, investors were clearly buying into the issue because they like the company and the equity story. The latter has been spiced up in recent months after SMIC bought control of Equitable-PCI Bank and announced that it will combine it with its own Banco de Oro to form one of the top three banking groups in the Philippines.
“A lot of investors view this stock as a proxy for Philippine investments,” one observer says, referring to SMIC’s range of assets, which aside from banking also includes retail businesses and property development. “And people are bullish on the macro-economic prospects for the Philippines right now,” he adds.
The zero-coupon bonds, which have a five-year maturity and a three-year put, were launched with a fixed conversion premium of 22% over Thursday’s close of Rs387.50. They include an issuer call after three years, subject to a 130% hurdle.
The bookrunners were believed to have provided asset swaps at 190 basis points, but given that SMIC is a very liquid credit not much of that was expected to be taken up. Other assumptions included a stock borrow cost at 5% and a protection in case the payout ratio exceeds 35% (equal to a dividend yield of about 1.5% at current prices).
This gave a very low bond floor at 89.7% and an implied volatility of 32%, which again confirms investors’ confidence in the equity.
“Basically, with no stock borrow available, the stock has to gain a lot in order for investors to make money,” one observer says.
In terms of volatility, the company also picked a good time to launch the bonds as this has spiked higher in the past month. Up until mid-January the volatility was only 20%-25%, but the 60-day vol has now crept up to about 28%.
And while the 22% premium might not seem that high in context of the gains in recent months, it is worth noting that it will result in a conversion price of Ps472.75, while the stock had never really traded above the Ps250-300 level before it started rallying in September.
Aside from the recent bank acquisition, investors have also been buying the stock on the back of plans for further investments into leisure- and tourism-related projects, including the first phase of a 40-hectare resort development within the Hamila Coast project which will be launched in March, and the fact that all the divisions within the group are delivering above forecast earnings at the moment.
One unusual feature with the bonds is the very long deferred settlement with the closing date not until March 19. This means there is an increased risk for investors in case of a surprise negative event. However, in the case of SM Investments, one source said investors weren’t too worried about this, given the quality of the issuer and the fact that several of its subsidiaries are also listed in their own right. The deferred settlement was said to be due to the company needing to wait for its year-end earnings to be included into the CB documentation.