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One of Asia's most prolific convertible bond issuers returned to the market for the first time in a year-and-a-half on Thursday with an S$650 million ($493 million) transaction to fund a tender offering for three existing equity-linked deals.
Singapore property developer CapitaLand has a reputation for executing extremely long-dated transactions by Asian standards and its new 10-year deal with a seven-year put was no exception. Its last deal in September 2013 was similarly 10-years in maturity with a five-year put.
The tender offering and new convertible is part of a balance sheet management exercise to bring down funding costs and extend its maturity profile before rates start to rise.
Under the lead of JP Morgan, the new convertible was launched at 2.30pm Singapore time and closed six hours later with participation from about 30 accounts. About 60% came from Europe and 40% from Asia.
By investor type, there was a similar ratio between outright funds on 60% and hedge funds on 40%. There was also some local private banking demand from Singapore.
Fixed terms at launch comprised an issue and redemption price of par, plus a conversion premium of 40% to the stock's S$3.55 close. The coupon and yield-to-put were marketed on a range of 2.3% to 2.8% before pricing was settled at the generous end, at 2.8%.
There is also a five-year call with a 130% trigger, plus an upsize option for a further S$150 million. One source close to the deal said CapitaLand will decide whether to exercise it after monitoring the progression of the tender offering.
Underlying assumptions comprise a bond floor of 92.2%, theoretical value of 101 to 101.5% and implied volatility of 23%. This is based on a credit spread of 170bp, stock borrow costs of 50bp, a 3% slippage in the stock price and a 26% volatility assumption.
The stock's historic volatility is extremely low at around 18%, but the lead was able to focus investors' attention on the group's outstanding deals, which trade at much higher implied volatility levels. The group's 2020 deal, for example, is currently trading at 26.6%, while its 2023 issue, puttable in 2018, is trading at 27.8%.
"Had we modelled this using historic volatility then the equity option would have become very expensive," said one observer. "A 26% or 27% volatility assumption makes it much more reasonable."
The conversion premium initially looked high but is in fact lower than the two oustanding deals. The 2020 deal was originally fixed at 45.8% with the 2023 deal at 30.9%.
The credit spread of 170bp also looks a little tight compared to the group's outstanding seven-year bond, which is trading around the 175bp level. However, the group also has a five-year CDS trading at 140bp, so the lead felt able to shave a few basis points off.
No asset swap was made available.
Bond analysts said the new deal looks attractive relative to outstandings, with a bond floor comparable to the 2020's (91.6%) and delta similar to the 2023's (39% compared to 37.7%).
Switching interest was noted ahead of the tender offering, which will be conducted by modified Dutch Auction on May 15.
A termsheet seen by FinanceAsia shows that CapitaLand is seeking to re-purchase the remaining S$467 million aggregate principal of its 2.87% 2016 bonds at a minimum offer price of 102.5%.
It is seeking to buy-back the S$227 million aggregate principal of its 3.125% 2018 bonds at a minimum offer price of 109% and the remaining S$1 billion outstanding paper in its 2.95% 2022 bonds at a minimum price of par.
The convertible was initially quoted around 99.75% in the grey market shortly after the deal launched, but was back up to par by Europe's close.
