Even so, the companyÆs inaugural CB attracted more than $1 billion worth of demand, which allowed the issuer to fix the conversion premium at the top of the range at 27% and increase the base deal size from $300 million. At the new size of $350 million, this is the largest CB by an Asian shipping company ever, according to a source, and the second largest by a Hong Kong-based company this year after New World DevelopmentÆs HK$768 million in May. The bonds have a maturity of five-years and two months, but can be put back to the issuer after three years and two months. Goldman Sachs, which took Pacific Basin public in 2004, was the sole arranger.
As the base deal was upsized, the initial greenshoe of $70 million to $90 million was reduced to $40 million. The reason for this was that the CB is based on a fixed number of shares which translates into 10% of the outstanding share capital and, as a result, the total bond size depended on the conversion price.
Based on the bookrunnerÆs guidance of a credit spread at Libor plus 350bp, the CB was also priced with a punchy bond floor of 88% and an implied volatility of 39%. However, the bonds will pay an annual coupon of 3.3%, which will offset some of the cost for the equity option. Coupons are an unusual feature on Asian CBs, which typically pay a yield only when the bonds are redeemed or put back to the issuer. In the case of the Pacific Basin bonds, the yield is equal to the coupon since the bonds will be both issued and redeemed at par. The coupon makes the CB quite equity-like on the basis that shipping companies typically pay high dividends.
Sources say Goldman offered no credit bid to back up its guidance.
The CB was offered with a coupon ranging from 3% to 3.8% and, while the source notes that the demand was strong enough to have allowed it to be fixed at the low end, the issuer was also keen to see the stock trade well today û and thus chose to be generous in terms of the yield. At an annual interest of 3.3%, the company will essentially have secured funding at 70bp below Libor. The conversion premium was offered in a range between 20% and 27%.
The deal is also unusual in that it has a ôcontingent conversion featureö which is designed to prevent investors from converting the bonds into equity prematurely and cause unwanted dilution. This feature was previously common in the US û due to a favourable accounting treatment û but this is believed to be the first time it has been used in Asia.
According to the term sheet, during the first nine months the bonds can only be converted in the case of an event such as an issuer redemption call, change of control, delisting or default, or if the CB is trading at a discount to its par value. After the first nine months and until three months before the bonds mature, they can also be converted if the share price is trading at least 120% above the conversion price. During the final three months there are no restrictions.
Based on the 27% conversion premium to yesterdayÆs closing price of HK$15.18, the conversion price was set at HK$19.28 û a price that is above the all-time closing high of HK$18.40 that the stock reached in late October. While it has been under some pressure since then, Pacific BasinÆs share price has more than tripled this year amid a positive outlook for dry-bulk freight rates.
Yesterday however, Goldman Sachs revised its outlook for the entire dry-bulk sector arguing that the peak in freight rates is now likely to come in the second half of 2008, rather than in the first half of 2009 as it had previously projected. As part of its new call, Goldman revised up its earnings expectations for 2008, but lowered them for 2009. Pacific Basin was retained at a ôbuyö but the target price was cut by 26% from HK$23 to HK$17.
While the timing of this downgrade obviously wasnÆt ideal, the source notes that the CB is actually ônot a bad way to play the sectorö as it gives access to the potential equity upside while at the same time providing downside protection. Ironically, the current volatility in the market and the concerns about shipping stocks after Sinotrans has slipped 16% below its IPO price in the first week-and-a-half of trading, may therefore actually have helped attract investors to the CB. Notably, the more than 100 buyers that came into the book included straight equity funds.
ôThe coupon is a bit lower than the current dividend yield of about 4.5%, but you also get the downside protection in case the share price should trade off,ö the source says.
Pacific Basin has been a popular stock since its IPO based on its strong earnings, high margins and ability to optimise the utilisation of its fleet. Of the 18 analysts who cover the stock, according to Bloomberg data, 16 have a buy recommendation, one has a hold and one a sell.
Meanwhile, specialist CB funds would have been attracted by the fact that this is shortable stock and therefore enables investors to trade the volatility. The implied volatility of 39% compares with an historic volatility of about 70%.
The assumptions included a 3% stock borrow cost and compensation in case the dividend payout ratio goes above 50%. Based on analyst earnings forecasts, this translates into a divided yield of about 5% at the current share price. The bonds, which are issued by a wholly owned subsidiary called PB Issuer but guaranteed by Pacific Basin, have an issuer call after three years and two months, subject to a hurdle of 130%.
The money raised from the CB will help fund existing capital commitments that are meant to be used for chartering and potential acquisitions of new ships.
This was the second Asian CB led by Goldman in less than a week following a $500 million issue for palm oil company Wilmar International, suggesting that the US investment bank is getting more aggressive in the equity-linked market. That trade, which had a 28% premium, was not as well received, however, and achieved sufficient momentum only after it was reoffered at 99.00. Prior to this trade, Goldman ranked third in the Asia ex-Japan equity-linked league table with seven completed transactions and a 7.8% market share.
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