CapitaLand extends debt maturity with S$1.1 billion CB

CapitaLand last night surprised the market by launching another convertible bond, adding further to its already bulging cash holdings. And true to form, the Singapore property developer brought a deal that was both larger and longer-dated than any other Asian CB this year - at S$1.1 billion ($762 million) and seven years (no put) respectively.

The company's previous two CBs, issued in February 2008 and May 2007, had tenors of 10 years (seven-year put) and 15 years (10-year put) respectively, and deal sizes of S$1.3 billion and S$1 billion. At the time of issue they both set a new record as the largest CB by a Singapore issuer.

The offering was priced at best terms for investors, but even so there was a lot of chatter in the market last night arguing that the pricing was too aggressive for a deal of this size and that the take-up had been lukewarm at best. Sources close to the offering told a different story, however, and stressed that the deal was about 1.5 times covered; had attracted around 70 investors, including some of the largest hedge funds that are frequent buyers of CBs; and had been allocated almost exclusively to external accounts.

A Europe-based investor at a major firm, which according to their own account put in a sizeable order, said their allocations had been scaled back quite significantly, essentially confirming that the order amount did exceed the amount of bonds on offer. Had that not been the case, most investors would have received virtually all of what they asked for.

The bonds were also said to have been bid at par in the gray market shortly after pricing, although it was unclear whether there were actually any trades. The offering has a S$100 million upsize option which can be used to stabilise the CBs in coming days should the share price slide more than expected and start to affect the value of the bonds. The bookrunners have until the end of August to exercise the option.

Given the size, this was obvious a highly contested deal among the banks that were given the chance to bid for it, and situations like that often give rise to suggestions that a deal is struggling. But this time at least, the demand appears to have been sufficient enough to place out the bonds and meet the company's dual objective to extend its debt maturity profile and strengthen its capital position as it begins its next growth phase.

Whether the pricing was on the tight side is a different issue, however, and there is no denying that CapitaLand was able to raise funds at a very attractive interest cost. Luke Olsen, an analyst with Barclays Capital in London, said the CB was "marginally cheap" at best terms only relative to the company's outstanding CBs and noted that there is also a lot of competition from European issuers that have recently been willing to issue at very cheap terms to ensure a good response from investors.

The buying interest may have been helped along by the fact that CapitaLand said last night that it will buy back $250 million worth of its 3.125% CB due 2018 (and puttable in 2015) at a combined cost of S$238.9 million. The bonds, which were issued in February last year, still have S$1.3 billion ($900 million) outstanding and will be bought back under a "capital management initiative," the company said in a press release issued last night. Some sources suggested the company may have decided to announce the buyback in response to muted demand for last night's deal, although the CB term sheet that went out at launch did state that the proceeds would primarily be used to refinance existing debt - with the remainder going towards new investments and working capital.

The latest bonds were offered with a semi-annual coupon between 2.375% and 2.875%, and as noted earlier, the final coupon was fixed at 2.875%. The bonds have a par in-par out structure so this is also equal to the yield.

Observers seemed to have less of an issue with the conversion premium, which was offered at 20% to 25% over yesterday's close of S$3.99 and fixed at 20% for an initial conversion price of S$4.79. The latter is roughly equal to where the shares were trading 12 months ago and with CapitaLand's share price having been on an upward trajectory since early March when it hit a low of S$1.78, there certainly seems to be scope for the share price to return to its year-ago levels.

However, there is a potential that this momentum will slow after CapitaLand yesterday reported its first quarterly loss in 5.5 years, citing writedowns and impairment losses on its investment assets. The CB issue may also take a toll in the near-term, although the potential dilution is relatively small at only 5.4%. The company said the net loss in the three months to June amounted to S$156.9 million, which compared with a net profit of S$515.2 million a year earlier. Revenues declined 28% to S$591.1 million. Excluding revaluation and impairment costs, the bottom line stayed in the black to the tune of S$124 million and the company also revealed that it was sitting on S$4.2 billion ($2.9 billion) of cash as of the end of June - following its $1.8 billion righs issue in the first quarter and before taking the proceeds from yesterday's issue into account.

The earnings were slightly below analyst expectations, but the share price held up quite well and finished the session only 0.25% down. This may be partly to do with the company's CEO, Liew Mun Leong, saying in a statement that the company believes the coming quarters will result in a better performance thanks to an improved sentiment in its core markets.

In a presentation to investors, published on the company's web site, CapitaLand also outlined its targets for its next growth phase, including plans to boost revenues from its China businesses to 35%-45% of the total and to extend its leadership within real estate investment trusts (Reits) and private equity funds.

Olsen of Barclays Capital and other CB specialists noted that this latest CB has a higher delta than CapitaLand's outstanding three convertibles, which are all out of the money. This means the bonds are more sensitive to share price movements and therefore should, in theory at least, appeal more to investors who want equity exposure. However, the demand was said to have been fairly evenly split between outright investors buying for the equity story and CB specialist hedge funds that like the fact that the stock is liquid and that there is plenty of stock borrow available in the market.

The credit spread was assumed at 340bp over Libor (really the Singapore dollar swap rate, since the bonds are denominated in Singapore dollars) based on the current levels of the existing CBs maturing in 2018 and 2022 respectively and CapitaLand's five-year credit default swap (CDS) which trade at 250bp over Libor. The stock borrow cost was conservatively assumed at 1% even though there has been plenty of shares available for lending since the rights issue was completed earlier this year, and bondholders will get compensated for dividend payouts above a set schedule that implies a dividend yield of 1.6% at the midpoint.

The bond floor worked out at 81% and the implied volatility at about 22%, versus a 50-day historic volatility in the high 30s.

Credit Suisse acted as the sole bookrunner for the issue, replacing J.P. Morgan which has arranged the previous three CBs for CapitaLand. The CB team at the Swiss bank has had a busy week, having also led Bumi Resources' well-received $375 million deal on Wednesday.