Suntec Real Estate Investment Trust has raised S$280 million ($226 million) from a Singapore dollar-denominated convertible bond that attracted a lot of demand despite being aggressively priced. In fact, at the final terms, the fair value was actually below par.
Even so, the deal was upsized in full from a base size of S$250 million and priced slightly inside the investor-friendly end with regard to the coupon and yield, which shows that CB investors grabbed with both hands at the opportunity to buy high quality paper from an investment grade issuer.
With a portfolio of top-quality commercial properties in Singapore, including Suntec City – Singapore’s largest integrated commercial development – and a one-third interest in One Raffles Quay, Suntec clearly fits the criteria of a blue-chip issuer.
The Singapore-listed Reit also has an outstanding S$270 million CB that matures next month and is trading slightly in-the-money. This helped to make investors more comfortable on price, but also supported the overall demand as many of the holders of the existing bonds were happy to buy into the new paper.
Other comparable CBs in Singapore, including those issued by property developer CapitaLand, are deeply out-of-the-money, one source said.
As per the latest available information on Bloomberg, none of the existing CBs, which were issued in 2008, have been converted into units in the trust (the final day to do so is March 13). However, it is possible that some bondholders will do so as the Reit is currently trading about 7% above the conversion price. The parity of the existing bond, at 106.97, is also above the redemption price of about 105.50.
However, most CB investors prefer the underlying stock or unit price to be at least 20% to 30% above the conversion price before they convert. Suntec said it will use the proceeds from the new CB to refinance debt, and it isn’t too far-fetched to expect that most of the money will go towards the redemption of the existing CB, which matures on March 20.
The new bonds have a five year maturity with a put at the third anniversary and an issuer call after three years, subject to a 130% hurdle. It was issued at par and offered with a coupon and yield of 1% to 1.5% and a conversion premium of 20% to 25% over yesterday’s close of S$1.795.
The coupon and yield were fixed at 1.4%, which is the lowest ever for a Reit in Asia ex-Japan, according to CB specialists.
The conversion premium was kept at 20%, but even that is not super generous given that Suntec is currently trading at a record high after gaining 47% in the past 12 months. The initial conversion price will be S$2.154.
However, the CB looked even more expensive from a technical point of view. At a credit spread of 200bp, the implied volatility worked out at 17%, which is well above the historic volatility of about 14% (or even lower depending on what period you look at).
In addition to that, dividend payments will have to exceed a yield of 4% before there is any adjustment to the conversion price. For 2012, Suntec paid a total dividend of 9.49 Singapore cents per unit, which translates into a 5.3% yield based on the current market price.
There are, however, plenty of units available for lending so the stock borrow cost is only 50bp. The bond floor is also quite high at 97%.
Investors didn’t seem to mind the hefty price tag though, and sources said the deal was fully covered 45 minutes after launch and multiple times subscribed at the bottom of the range when the order books closed after just one-and-a-half hours. Initial estimates suggested that the demand was fairly evenly split between outrights and hedge funds, partly thanks to a couple of sizeable orders from large outright investors in Europe.
The CB was initially indicated slightly below par in the grey market, but once the bookrunners went out with a “books covered” message, it pushed higher. In the late Hong Kong evening the bonds were bid at 100.25 and offered at 99.75, one source said.
Suntec Reit is the second largest Singapore-listed Reit in terms of assets under management. It is managed by a unit of ARA Asset Management, which is an affiliate of Li Ka-shing’s Cheung Kong Group. It is rated Baa2 by Moody’s and has been listed in Singapore since December 2004.
The Reit posted a 3.1% decline in gross revenues last year to S$261.9 million, and a 3.5% drop in distributable income. This was partly due to the divestment of the Chijmes retail property in January last year and the closure of Suntec Singapore Convention & Exhibition Centre and Suntec City Mall for asset enhancement works in the fourth quarter.
The enhancement work will be undertaken in three stages and is scheduled to be completed by the end of 2014. The estimated capital expenditure for this of S$230 million will be funded by the proceeds from the sale of Chijmes and bank borrowings.
At the end of last year, it had total assets of S$7.7 billion and a net asset value of about S$2.04 per unit.