Singapore’s Fullerton Health turned to the perpetual bond market on Thursday, becoming the latest company to adopt a structure that allows issuers to boost their equity capital — and gives investors a much-needed source of yield.
The unrated, privately-held company turned to investors around four months after jettisoning a plan to list on Singapore’s stock exchange. It blamed the cancellation of that deal on “market uncertainty” — but in the bond market the company got a much smoother reception.
This was partly because investors are eager to buy perpetual bonds from a range of issuers, thanks to the higher yields on offer. But the rarity of such deals from the healthcare sector also appeared to help. There were four bonds from healthcare companies last year, the first deals since 2012, according to Dealogic. But Fullerton is the first to sell a dollar perpetual.
“The rarity value of healthcare credits in Asia offers investors other channels to diversify their portfolios,” Sherwin Loh, a board member at Fullerton Health and a managing director at SIN Capital, controlling shareholder of Fullerton Health, told FinanceAsia in an interview.
After meeting more than 50 investors in Singapore and Hong Kong this week, Fullerton Health received a large number of anchor orders and reverse enquiries, prompting the company to launch the perpetual bond earlier than originally planned.
Fullerton Health generated more than $600 million of demand at the peak level, before the order book closed with $525 million of orders from 82 accounts, according to a syndicate banker familiar with the deal. As a result of strong demand, the Reg S deal was upsized to $175 million from original target of $150 million.
The sole bookrunner — Credit Suisse — initially pitched the maiden bond at a yield in “the 7.25% area”, before tightening pricing to 7%. Final pricing was at par to yield 7%, according to a term sheet seen by FinanceAsia.
The bonds become callable on April 6, 2020. The coupon rate is fixed for the first three years, but if the company decides to skip the call the coupon will reset to the prevailing three-year US Treasury yield plus an initial spread of 548.5bp — and a 500bp step-up on top. That makes it likely that the company will call the bonds in three years, potentially replacing the deal with true equity in the meantime.
“In our opinion, the perpetual deal should be treated as bridge equity for our acquisitions in the future, without diluting equity value or increasing gearing level,” Ramesh Rajentheran, group CFO at Fullerton Health, told FinanceAsia in a separate interview. "I think this is a win-win for investors and our growth-focused management team."
The strong demand for the deal continued in the secondary market on Friday morning. In morning trading, the bond was quoted at a cash price of 100.5/101, according to a syndicate banker.
To figure out fair value, bankers used commodity trader Trafigura’s recently-issued $600 million 6.875% perpetual bond as a reference. That bond was trading at “high 6%” during on Thursday morning, according to a syndicate banker.
"The final pricing was pretty generous to investors, in part to compensate for them buying into a debut and unrated issue," the banker said. "On the other hand, there was about $200 million of anchor orders before the deal was launched, boosting our confidence to launch the deal."
The majority of the bond was sold to Asian investors, leaving 5% to European accounts. Unlike many perpetual deals, which rely on demand from private banks, fund managers took an overwhelming chuck of the deal, representing 75% of the book. The remaining 25% went to private bank accounts.
The company plans to use the proceeds to funds acquistions across Asia Pacific. It is eyeing a speciality services provider in Singapore, a healthcare services company in Australia and corporations in other strategic markets.
Perpetual push
The success of the perpetual bond underscores the intensifying search for yield among Asian investors, which has allowed corporate issuers to sell bonds with no fixed maturity date — and that often get treated as equity from an accounting and rating standpoint. Fullerton’s bond will get 100% equity accounting.
"This equity-accounted perpetual bond allows the company to optimise our capital structure and tap into a different class of investors taking advantage of conducive market conditions," said Loh, a former Goldman and JP Morgan banker.
Fullerton Health’s perpetual bond is the first from the sector in Asia's international bond market, although Chinese healthcare companies have issued $1.785 billion worth of renminbi-denominated perpetual bonds since December 2014, according to Dealogic.
According to a marketing material obtained by FinanceAsia, the privately-held company is now evaluating bringing in some strategic investors. Rajentheran sounded confident in the attractiveness of Fullerton to such investors, pointing to Asia's emerging middle class as a compelling investment story.
"Our existing markets, which include fast-growing markets such as Indonesia, remain attractive," the former Barclays banker said. He also pointed to opportunities to grow its reach into China and Vietnam, among other countries.
The company was forced to compete with another potential bond on Thursday. Hong Kong Airlines returned with a $315 million tap to an outstanding $250m issue. The company closed the deal with a yield of 7.12%, down from initial price talk of “the 7.25% area”.
Chinese computer maker Lenovo launched a $150 million tap of its own perpetual deal on Friday. The issuer was planning to upsize its $850 million 5.375% deal, and was eyeing a price of around 5.235% when this article was written.
