Temasek divests Keppel stake

The Singapore government agency continues its divestment program through an exchangeable bond into Keppel shares.

JPMorgan successfully completed a S$792 million ($471 million) exchangeable bond for Temasek on Tuesday night. The bond is exchangeable into shares of Keppel Corporation and represents 10% of Keppel's outstanding shares. Once the bonds have been exchanged, Temasek's stake in Keppel will fall from 32% to 22%.

The deal was a bought deal and was launched at 10pm Singapore time on Tuesday night and was fully sold by 11pm, according to bankers who worked on the transaction. 70% of the deal went to European accounts, 21% went to offshore US accounts and 9% went to Asian accounts. The bankers say that most of the bonds were sold to dedicated convertible buyers, although of those how many were also hedge funds is open to discussion.

The five-year bonds have a put at year three and a fairly high conversion rate of 38%. They were issued at par. Investors were attracted to the strong credit of Temasek, which backstops the bonds and by the equity story of Keppel, a Temasek-linked company (TLC) whose shares have gone up more than 200% in the past two years.

Terms of the bonds included a 0% yield and 0% coupon and a bond floor of 94%. The implied volatility was 29% although the lead used a historic volatility to arrive at a theoretical value of 100.7%. The credit spread of the bonds was 25bps over three year Libor while the borrow cost was 0.5%. The dividend yield is 2.6%.

The sale comes as part of Temasek's ongoing divestment program, which is seeking to raise funds as it exits businesses that no longer need its support or are no longer strategic. At the same time, Temasek has been one of the most active investors in the region over the past few years, snapping up stakes in banks, telecoms firms and even airlines as it seeks to become more commercial and boost its portfolio. Over the summer, the company aims to launch its inaugural global bond and, with that deal, open its books to the public for the first time.

In a letter to the company secretary of Keppel sent by Jeffrey Chua, a director at Temasek, the firm outlined its reasons behind the sale. "The offering of the notes is part of our corporate financing programme and ongoing active management of our portfolio," he wrote. "Through the offering we aim to raise funds to meet our investment needs in the region. We remain the single largest shareholder of the company and the company continues to be a key stock in our portfolio. We currently have no plans to further divest our shares in the company."

For JPMorgan, the firm can revel in a job well done. In particular calling the right place for the conversion premium without a book build was always going to be an art rather than a science. Last month the bank priced a $184 million convertible for Singapore Petroleum as that company seeks to buy BP's Singapore oil refinery. That deal had a very punchy conversion premium of 47%. In January, Merrill Lynch priced another Temasek exchangeable when it sold a S$1.25 billion exchangeable for Temasek into Singapore Telecom. That deal had a conversion premium of 29%. Thus the Keppel exchangeable was sold with a conversion premium right in the middle of those two previous bonds. JPMorgan has now done three of the four equity-linked deals from Singapore this year.

Asian issuers are right in the sweet spot for equity-linked deals at the moment. Good economic growth is helping share prices rise across the board. Improving credit fundamentals are also supportive of the market and bankers expect 2004 to end up as one of the busiest on record.

This latest deal in particular appealed to investors as it was a diversification away from the Taiwanese tech firms which tend to dominate the market. Interestingly the regional equity linked market is flourishing without the involvement of the US markets. This latest deal was Reg S and bankers close to the deal say that there was really no trouble in placing it without a 144A tranche. Fees were not disclosed.

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