Indonesian palm oil producer First Resources issues $100 million CB

Indonesian crude palm oil (CPO) producer First Resources last night raised $100 million from the sale of five-year convertible bonds to finance its organic growth, including the development and plantation of new land acquired in 2008.

The deal was well-received by both outright investors, who like the company's low-cost production, better than average Ebitda margins and strong financial profile, and hedge funds, which welcomed the fact that the majority shareholder was making stock available for borrowing. This left the offering about 3.5 times covered and allowed the terms to be fixed inside the best end for investors.

First Resources is the second Indonesia-based issuer to sell CBs this year following Bumi Resources' $375 million deal in late July and only the second Asian company to bring a public CB this month. Issuance has been quiet over the past couple of months as many companies are waiting to complete their first-half financials before going ahead and, at the moment, many investors are also on holiday which makes it more challenging to bring a large deal. First Resources released its first-half earnings last week, which were in line with expectations, and sources said the company saw an opportunity to come to market ahead of an anticipated pipeline of potential issues next month. There is always a risk that small issuers get overshadowed by larger deals at busy times and the level of demand received last night suggests that the company made the right decision on timing.

The CB matures in September 2014, but can be put back to the company after two years. It was marketed with a coupon ranging from 5.375% to 5.875%, a yield between 6.25% and 6.75%, and a conversion premium between 20% and 25%. Some investors noted that the coupon was low compared with Bumi Resources' 9.25%, but sources said this was warranted since Bumi also had a higher conversion premium of 30% and allowed for a dividend yield of as much as 4.5% before the CB investors get any compensation. First Resources will compensate investors for dividend yields above 1.5%.

Thanks to the strong demand, sole bookrunner Credit Suisse was able to push the yield and the premium towards the issuer-friendly end, while the coupon was fixed at the mid-point of the range at 5.625%. The yield ended up at 6.375% and the premium was set at 23.5% over yesterday's closing price of S$1.01, resulting in a conversion price of S$1.247. That price is well above the closing high for the past 12 months of S$1.07 (which it hit last week just before the release of the first-half earnings), but below the record high of S$1.84 from January 2008 -- one month after the company's initial public offering.

The issuer can call the bonds after three years, subject to a 130% hurdle.

Investors were said to have been okay with the tighter price partly because the allocation was skewed towards outright investors. The latter suggests that the share price will suffer less today as there will be less short-selling by hedge funds that want to hedge the CBs they have just bought. That allocation decision could have been driven by the fact that the stock borrow provided by controlling shareholder Eight Capital (an investment vehicle owned by the Fangiono family) may have been somewhat limited. There was no information on how many shares Eight Capital was prepared to lend, but some hedge funds at least saw their orders scaled back.

The demand was said to have come roughly 50-50 from hedge funds and outright investors. In all, about 50 investors submitted orders.

The bookrunner went out with a credit spread of 1,000bp over Libor, which was based on the current spread of an outstanding $141 million high-yield bond issued by First Resources' plantation subsidiary Ciliandra Perkasa. That bond, which is secured and matures in 2011, currently trades at about 800bp over Libor.

Assuming a stock borrow cost of 100bp, the pricing terms led to a bond floor of 86% and an implied volatility of 28%, which compares with a 100-day historic vol of around 70%, according to Bloomberg data.

First Resources reported a 31% drop in revenues to Rp996.8 billion ($100 million) and a 28% decline in net profit to Rp371.1 billion for the first six months of this year from the first half of 2008, as lower average selling prices offset an increase in both production and sales volumes. Average selling prices have been edging higher, but First Resources has not been able to benefit since it had committed to forward sales at lower prices for the first half.

In a comment to the earnings, the company noted that fundamentals of the palm oil industry have remained favourable and inventory levels in both Malaysia and Indonesia have stabilised at lower levels than where they were at the beginning of 2009 due to robust consumer demand. In the second half, most of the company's CPO production will be sold on a spot price basis, it said, and added that the spot price is currently higher than its average selling price in the first half.

Due to seasonal patterns, the company's production volume is also expected to increase in the second half and "barring any unforeseen circumstances, the group believes that it should be able to deliver stronger operational performance in the second half".

That said, First Resources' share price has already had a strong run in line with an improvement in commodity prices -- it is up 296% since the 2009 low in early March -- and several analysts have recently revised down their recommendations to hold or neutral arguing that the stock is already fully valued. Some analysts are also hesitant to apply the same valuation multiples as for some of its larger competitors due to its smaller CPO output, which amounted to 280,000 tonnes in 2008. First Resources is also still viewed largely as a small-cap stock, even though the strong rally this year has boosted its market capitalisation to about $1 billion.

First Resources has 13 palm oil plantations in Indonesia, totalling 97,000 planted hectares, according to the company's website. After opening one new mill in the first half of this year, it now has eight palm oil mills. Aside from its low production costs and wide margins, the company also stands out because of its young plantations, which have an average age of just eight years.