Agricultural commodities trader Olam International sold its first US dollar-denominated perpetual bond on Wednesday taking advantage of strong primary markets and investors’ ongoing hunt for yield.
Proceeds from the $500 million subordinated deal are being largely used to re-finance an S$275 million ($204 million) perpetual bond, which is callable next March and has a higher 7% coupon.
The unrated borrower played very much to its home market, attracting a peak order book of $1.8 billion according to syndicate bankers.
The agricultural commodities sector is not faring well and Olam has had some well-publicised issues following a highly critical report by US research firm Muddy Waters in 2012.
However, most investors did not appear to see beyond the Temasek halo effect. The Singapore government investment company took control of Olam in 2014 and currently owns a 51.64% stake, with Japanese trading house Mitsubishi on 20%.
As a result, there was a very strong showing from local investors, with 71% of the deal distributed to the Lion City, with a further 20% to the rest of Asia and 9% to Europe.
By investor type, private banks took 54%, followed by fund managers on 42% and banks 4%.
Heavy demand from private banks was also not very surprising, although overall they accounted for a slightly lower percentage than they did in April when they took 57% of a $300 million senior Olam deal.
Initial guidance on the new Reg S deal was set at the 5.5% area before being tightened by 15bp.
Final pricing of the $500 million issue was fixed at par on a coupon of 5.35% to yield 429bp over Treasuries, according to a term sheet seen by FinanceAsia.
The perpetual deal is callable after five years and at every distribution date thereafter. There is a re-set in year five with a 200bp step-up.
Coupons can also be deferred and the subordinated deal ranks senior only to common shares.
The closest comparable is Olam's recently issued 4.5% April 2021 senior bond. This was variously being quoted at anywhere from 3.89% to 4.031% on Wednesday.
Fund managers said a roughly 145bp pick-up from senior to subordinated was about right.
A second comparable comes from Singapore-listed wastewater treatment company Citic Envirotech. It has a 5.45% perpetual bond, which was being quoted around the 4.105% mark on Wednesday.
Citic Envirotech's perpetual bond is callable in November 2018 with a cliff structure that will lead to a 500bp coupon step-up.
But for investors, the real comparable is triple-A rated Temasek. If the latter views Singapore-listed Olam as a strategic asset for Singapore then the perpetual deal offers the winning combination of a high yield and quasi-sovereign status.
One banker commented that, “some non private banking investors did gauge the issuer on its stand-alone financial metrics.”
These are not particularly enticing. The group reported a net loss of S$61.5 million in the 2015 financial year and total debt to Ebitda of 9.9 times according to S&P Global Market Intelligence data.
However, the deal appears to have hit a sweet spot in the market and a second banker said, “Asia’s G3 market bond has certainly bounced back to life. Lots of companies are looking to raise fresh funding in the low-yielding environment.”
US dollar-denominated funding also makes a lot more sense for Olam than Singapore dollars since it is its trading currency.