Temasek issues exhangeable into Standard Chartered

The well-received three-year bonds raise an initial S$650 million, but the exercising of a greenshoe may increase this to S$800 million.

Temasek Holdings yesterday morning raised S$650 million ($513 million) from the sale of three-year bonds that are exchangeable into shares of London-listed Standard Chartered. The deal came amid continued market volatility and an uncertain outlook for financial sector stocks in particular, but was well received by investors who jumped at the opportunity to get exposure to a AAA credit, ie Temasek. The Singapore investment company owns about 18% of Standard Chartered.

A clear indication of the strong demand was that the exchange premium was fixed at the top of the 22% to 27% range. According to sources, the order book reached S$1.25 billion, or almost twice the size of the deal, and as of yesterday it seemed likely that the S$150 million greenshoe would also be exercised, increasing the total deal size to S$800 million ($632 million). If that is the case, it will be the largest equity-linked deal in Asia since Lotte Shopping raised $900 million from a dual-currency CB in June and the third largest deal this year after Lotte and Wharf Holdings’ $800 million CB in May.

It is also only the second equity-linked transaction since early August. However, given Temasek’s unique status as a AAA credit, this deal could perhaps have gotten done in any market conditions. Hence it may not necessarily be a transaction that reopens the Asian CB market for other issuers.

The exchangeable bond (EB), which was launched after the London close on Monday and priced before the Hong Kong opening yesterday, was issued by wholly owned Temasek Financial (III), but is guaranteed by Temasek Holdings. Bank of America Merrill Lynch was the sole bookrunner.

It was offered with a zero percent coupon and yield, something which investors have not been particularly keen on this year. However, again the credit rating worked its magic and one source said there was no push-back from investors on this particular issue. In fact, investors were said to have viewed the terms as “undemanding” even though Standard Chartered’s share price has been on a declining trend for most of this year.

Even after a 22.2% rebound in its share price from the year low of £11.695 on October 4, the emerging markets-focused bank was down 17.2% year-to-date when the EB was launched on Monday night. The share price fell 2.7% in London trading yesterday to £13.90. The bank’s Hong Kong-listed shares fell 5.6% to HK$167.20, although that was in the context of a 4.2% drop in the Hang Seng Index.

The 27% exchange premium over Monday’s close of £14.29 translates into an initial exchange price of S$36.2912 at current exchange rates.

The EB was issued at par and in light of the short three-year maturity, it features neither a put nor a call — aside from the usual clean-up and tax calls. It was marketed at a credit spread of 110bp and a stock borrow cost of 35 basis points. Bondholders will be compensated for dividend payouts that exceed a 3.5% yield, which is not particularly generous given that Standard Chartered is currently trading at a historic dividend yield of 3.1%.

At the final terms this resulted in a bond floor of almost 95% and an implied volatility of 26%.

According to sources, the deal attracted 46 accounts from Europe and Asia. About three-quarters of the demand came from hedge funds, but the allocation favoured real-money accounts and in the end 66% of the deal went to hedge funds and 34% to real money accounts, also referred to as outright investors.

The geographical split showed that 67% of the issue went to UK-based investors, 13% to Hong Kong accounts and the remaining 21% to investors based in continental Europe.

Market participants said the bonds were holding around par during Hong Kong trading hours yesterday, although trading volumes were said to be thin. More activity was expected in London later in the session.

Temasek has been undergoing a major review of its portfolio assets in the past few months, which has included both sales and acquisitions, as well as a recapitalisation of several portfolio companies under its control. It is not entirely clear what the purpose of this particular deal is, however. The term sheet revealed little of the firm’s intention, except to say that the net proceeds will be used by Temasek and its investment holding companies to fund their ordinary course of business.

The investment firm has previously used exchangeable bonds as part of sell-downs in various portfolio companies, but since this particular EB accounts for only about 4.2% of Temasek’s stake in Standard Chartered and less than 1% of the bank’s overall share capital, it doesn’t really suggest that an aggressive sell-down is on the cards. More likely, Temasek is using the bonds as a way to raise cash at a time when widening spreads is making the Asian bond markets less attractive.

Temasek first invested in Standard Chartered in early 2006 when it bought the Khoo family’s 12% stake, and as of March 31 owned about 18%, according to its website.

Temasek is a rare issuer in the Asian equity-linked market and this is only its third deal in the past seven years. In 2004 it issued a S$792 million bond exchangeable into Keppel Corp, a Singapore conglomerate active in offshore and marine businesses, infrastructure and property, through J.P. Morgan, as well as a S$1.25 billion bond exchangeable into Singapore Telecom, which was also arranged by Merrill Lynch.

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