CapitaLand raises S$650 million from seven-year CB

Singapore-listed real estate developer CapitaLand last night raised S$650 million ($516 million) from the sale of seven-year convertible bonds, which it will use partly to buy back part of an outstanding CB that matures in 2018.

The deal came almost two weeks after two smaller deals from Taiwan’s Asia Cement and Hong Kong-listed China Daye Non-Ferrous Metals Mining reopened the Asian CB market after two months with no issuance at all, and was no doubt aiming to tap into the improving investor demand for equities.

However, it hit the market on a busy night that saw four block trades and one other CB, a $550 million Hong Kong dollar-denominated deal by Hengan International Group, fight for investors’ attention.

Of the two CBs, CapitaLand launched first, and managed to get close to two-hour head start on Henan, which clearly didn’t hurt since the Singapore deal came with more aggressive terms. For one, it was the first seven-year CB with no put option in Asia since Olam’s somewhat ill-fated transaction in September 2009, which had made both issuers and investors a bit scared of that long a tenor.

CapitaLand has a history of issuing CBs with long tenors, however, and being the largest real estate developer in Singapore, a repeat bluechip issuer and a strong credit, it does mostly tend to get away with it.

It too did a seven-year deal with no put in 2009, and in 2006 it issued a 10-year CB with a seven-year put. In between those two, in May 2007, it entered the record books with a 15-year deal that came with a first put option at the end of year 10 and a second one at the end of year 12, giving it an effective 10-year maturity. That same CB also came with a 72% conversion premium.

Last night’s deal wasn’t quite as aggressive, but the initial conversion price was fixed at an even S$5.00, which is a level that CapitaLand hasn’t traded at since the middle of 2008. After gaining about 10% from this year’s lows in early March, the stock is currently up a modest 0.2% since the beginning of the year — underperforming Singapore’s benchmark index and even the Singapore real estate investment trusts.

The company also have four other outstanding CBs that are all trading out-of-the-money. However, CB investors don’t seem particularly concerned about this. Indeed, they are generally happy to hold CapitaLand CBs because there is no uncertainly about the credit. Also, sizeable CBs from top-rated issuers are a rarity these days. Aside from Hengan’s slightly larger deal last night, this is the biggest Asian CB (outside the China A-share market) in more than a year.

That said, this latest bond does offer more equity optionality than the 2018 CB that it is offering to buy back. Some investors can therefore be expected to take the opportunity to switch into the new CB. Some such investors were said to have participated in the transaction last night, while others — particularly private banking clients who tend to need more time to make investments — may do so over the next couple of weeks.

Its new CB, which matures in June 2020, was offered with a coupon and yield of 1.375% to 1.875% and a conversion premium between 30% and 35%.

According to sources, the deal was covered after about one hour with some investors putting in their orders at the investor-friendly end, while others came in around the mid-point, likely in order to ensure they would get their desired allocation.

The bookrunners then spent the next couple of hours migrating investors towards a more aggressive pricing and in the end the coupon and yield were fixed slightly inside the wide end at 1.85%. According to one source, this is the lowest yield on a seven-year CB in Asia-Pacific since 2003. The conversion premium was set at 32.6%.

While this led to some investors dropping out, one source said there were still more than 60 accounts that participated in the transaction.

The deal drew strong demand from outright investors, particularly European-based accounts that have been investing in this name before. But given the ability to hedge both the credit and the equity option, there was a lot of hedge fund demand as well.

The offering came with an upsize option of S$150 million, which wasn’t exercised last night. One source said the company chose to hold off on that as it didn’t want to be overly aggressive. However, there was enough demand to allocate the additional bonds and if the CB holds up in the aftermarket, the bookrunners can exercise the option at any time over the next 30 days.

As of last night, the bonds were indicated at around par in the grey market. And given that the deal size is quite small relative to CapitaLand’s market capitalisation – based on the initial conversion price, the CB will convert into 130 million shares, which will account for no more than 3.05% of the existing share capital – there should be a limited amount of dilution-related selling.

The CB was marketed at a credit spread of 190bp, which was based on the trading level of CapitaLand’s credit default swaps and its outstanding straight bond maturing in 2022.

The stock borrow cost was assumed at 50bp and the dividend yield protection at approximately 3% ― the conversion price will be adjusted for dividends and extraordinary distributions above an absolute level that starts at S$0.077 per share in 2013 and will increase gradually each year to S$0.15 per share in 2020.

At the final terms, this resulted in a bond floor of about 91.2% and an implied volatility of approximately 22%. The latter compares with an historic volatility of 20% to 22%, irrespective of whether one looks at a 30-day, 100-day, or 260-day period, one source said.

Meanwhile, CapitaLand said in an announcement to the Singapore Exchange yesterday evening that it will invite holders of its 3.125% CB that matures in 2018 to tender their bonds in return for cash. The CB was issued in March 2008 at a size of S$1.3 billion ($920 million based on the exchange rate at the time) and currently has S$1.05 billion left outstanding.

The company didn’t specify how much of the bonds that it will be buying back, but said this will be determined by May 30 following investor feed-back. The tender will be done through a modified Dutch auction, which means investors will submit a certain number of CBs at whatever price they would like to sell them, and the issuer will then decide on a single price at which it will buy back bonds.

The expectation would be that it will set the price at a level where it will be able to buy back as many CBs as possible without overpaying, rather than go for the maximum number.

The minimum price has been set at 109% of face value plus accrued and unpaid interest, while the maximum price will also be announced by May 30. The tender opens today and closes at 5pm Singapore time on June 11.

The CB was jointly arranged by Bank of America Merrill Lynch and Credit Suisse, while Credit Suisse is the sole bank involved in the tender.