Strong demand for exchangeable bond into IOI Corp

Pricing is pushed to the aggressive end of the range as the long-awaited bond issue is more than six times covered.
IOI Capital has sold $370 million worth of bonds exchangeable into its parent company, Malaysian palm oil producer IOI Corp, at a price that must be described as aggressive.

IOI Corp, which also manufactures oleochemicals and specialty oils and fats and is active within property development and investments through a subsidiary, will act as guarantor for the bonds.

With $2.5 billion worth of orders and 125 accounts in the book, Citigroup as the sole bookrunner managed to push the yield to put all the way to the tight end of the 3% to 4% offering range, which resulted in an implied volatility at a significant premium to historic levels.

Even at a 4% yield the implied volatility was only at par with the 100-day vol of about 24% and at a slight discount to the 260-day vol of 26%, one source notes. At 3% the implied vol increases to 30%, which gives the bonds a fair value of about 98.5%, he estimates.

However, the combination of IOI being a strong investment grade credit, the underlying stock being a favourite among analysts and ample liquidity in the market conspired to create the momentum needed to drive the price towards the tight end.

ôThere is a shortage of good size investment grade paper in this market and itÆs a stock people are in love with. When that happens people kind of throw valuations out the door,ö the source says.

The size was also slightly smaller than the $500 million originally talked about as the company has obtained other sources of funding at attractive terms to make up the difference and that too would have helped to build momentum in the book. All the tier-1 CB investors and a good portion off the tier-2 names were believed to have come into the deal, which was launched just after the local market closed on Tuesday.

The zero-coupon bonds have a five-year maturity and a three-year put and were issued at par. They were offered with a fixed conversion premium of 25%, which explains the wide yield range. There is an issuer call after two years, subject to a 130% hurdle, to force early conversion.

The reference price is equal to the 10-day volume weighted average price of M$18.80 which is slightly below yesterdayÆs closing price of M$19 - a close that marks an all-time high for the stock. The share price has rallied 53% this year, outperforming the 20% gain in the benchmark index.

The valuations were based on readily available asset swaps at 55 basis points and credit default swaps at 20 basis points. Investors will be protected if the dividend payout ratio goes above 50%, which translates into a dividend yield of about 2.3% based on current prices. The stock borrow cost was assumed at 5%.

At a 30% implied volatility, this gives a bond floor of 93%.

The entire net proceeds from the exchangeable will be lent or otherwise channeled to IOI Corp, which will use it to repay inter-company and bank borrowings and to fund capex and other investment opportunities that may arise.

Earlier this week IOI Corp said it has agreed to buy all of the Aditya Birla Group of IndiaÆs palm oil refining operations in Malaysia at a price of M$423 million ($120 million). The acquisition will enhance the companyÆs downstream palm oil operations and will also provide it with 1 million tonnes of additional refined products production and fatty acid capacity, according to a ratings note by MoodyÆs Investors Service.

As the acquisition is relatively small and will be funded by cash on hand, it will have no material impact on IOIÆs financial profile, MoodyÆs said as it affirmed IOI CorpÆs A3 rating. At the end of September, IOI had cash and liquid funds balances of M$1.15 billion ($325 million).

In a research note issued last week, Citigroup argued that an investment into Pan Century would boost IOIÆs oleochemical capacity by 350,000 tonnes/year to more than 500,000 tonnes, making the company the largest producer of vegetable oil-based global fatty acids in the world.

Media reports in Malaysia have also suggested that the company may be about to make an investment into an oleochemical or biodiesel plant in the EU.

After being expected by the market for months, the bond issue took less than five hours to complete as the market was prepared for it. Investors also know the credit well and basically they just needed to look at the terms and make a decision, one observer says.

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