Hospital operator brings first dollar CB from Thailand in over three years

Bangkok Dusit Medical last week raised $110 million from the first convertible bond issue by a Thai company since December 2002, taking advantage of the positive investor sentiment towards the healthcare sector.

The issue, which was arranged by Macquarie Securities, has an unusual structure in so far as it is denominated in US dollars but has the baht as the functional currency. This means that the interest and principal payments are fixed in baht, but will be paid to investors in an equivalent amount of US dollars that will vary depending on the exchange rate.

“In the mid-90s there was a lot of US dollar CB issues out of Thailand, which all became very toxic for the issuers during the financial crisis as the currency deteriorated and there has been quite a negative stigma towards CBs in Thailand ever since then,” says one observer.

At the same time, there are numerous restrictions related to the remission of baht outside of Thailand which meant that selling a baht-denominated issue to foreign investors wouldn’t have been that simple either. This structure enabled the company, which is the largest listed hospital operator in Southeast Asia, to overcome both these issues, while at the same time allowing it to raise its quite low profile with international investors, the observer adds.

Some potential investors were said to have backed off because of the currency exposure, but with the medium-term view among analysts favouring strengthening Asian currencies, the issue didn’t pose too much of a hurdle. And, more surprisingly perhaps, nor did the current political turmoil in Thailand, which was said to have raised no questions during the roadshow.

Supposedly the fact that the private healthcare sector is relatively remote from government intervention did play a role here, but investors are also likely to have focused more on the growth potential both for the company and the healthcare sector. In Thailand this sector is expected to grow by 10% to 15% per year as it benefits from medical tourism.

Bangkok Dusit currently derives about 30% of its revenues from patients who fly in from the Middle East, North Asia and Southeast Asia. The rest is generated from domestic patients, who are typically upper- to middle-class people who have been pushed out of the public system because of overcrowding and are happy to pay for a higher level of service in the private sector.

After a three day roadshow with meetings in Hong Kong and London, the deal ended up being 1.5 times covered with approximately 30 investors taking part. Geographically, the demand was well distributed with about 25% each going to continental Europe and the UK, 30% to Asia and 20% to offshore US accounts.

The scarcity of Thai CBs in recent years was believed to have contributed to the demand, as many specialised CB investors lack exposure to the country.

The bonds, which pay a 3.75% annual coupon, have a five-year maturity but can be put back to the issuer after three years for a yield of 6.25%. That compares with the five-year Thai baht swap rate which is currently at about 5.95%.

The conversion price was fixed at Bt36.3, or at a 21% premium to last Wednesday’s closing price of Bt30. There is an issuer call after three years, subject to a 135% hurdle.

The bond floor was set at 94.5% with an implied volatility of 30%. There is no stock borrow available, however, making the latter rather academic. The historic volatility is about 30-40% and the share price has risen 23% over the past five months. It did jump 6.7% to Bt32 on Thursday after the CB was priced, but then fell back again on Friday to a close of Bt30.50.

The assumptions included a credit spread of 250 basis points and Macquarie provided credit default swaps at that level for about 40% of the deal, which were said to have been almost entirely taken up. There will also be some dividend protection, although the issuer has the right to gradually increase its current payouts of Bt0.5 per share each year.

Investors were said to have like the company because it has made heavy investments into new beds, its existing hospitals and acquisitions over the past three years and is now well positioned for growth.

“It now has significant capacity to be able to grow quickly without significant additional capex,” the observer says.

The stock currently trades at 38 times its earnings in the fiscal year to March 2006, which compares with 22 times for Bumrungrad Hospital. The latter is considered a key comparable given its similar size, quality of service and international patient base. Another regional peer investors look at is Singapore-listed Parkway Holdings, which trades at 28 times its 2005 earnings.

The proceeds will be used to refinance existing domestic debt to achieve a lower cost of capital.

A banker familiar with the Bangkok Dusit issue said he expects Thai issuers will start looking at the international CB market again as the company discovers that there are ways – like this structure – to get comfortable with the currency issue.

This particular deal was a result of Macquarie’s joint venture with TMB Bank in Thailand that was launched in February and TMB Bank’s long-standing relationship with the company. The Macquarie-TMB Bank JV acted as financial adviser to the company for the transaction.