Keppel Land reoffers CB below par

After a full month with no convertible bond issues in Asia, Keppel Land came to market yesterday with a S$500 million ($389 million) five-year transaction. However, if the issuer thought that investors were starving for new paper and would be keen to snap up anything that came their way, it was quickly proved wrong.

While the quasi-sovereign Singapore developer is viewed as a strong credit, many investors baulked at the terms on offer and the two bookrunners ended up reoffering the transaction at 99.00. A key reason for the mismatch between the offered terms and the price investors were prepared to pay was the 14% rally in Keppel’s share price over the past five sessions, which left the pre-agreed terms a bit too aggressive. However, the bookrunners stood by their underwriting commitment and, once it became clear that the deal wouldn’t clear at par, they decided to cut into their fees and reoffer the bonds at a 1% lower price, so as to ensure the deal would work both for the issuer and the investors. According to one source, the bookrunners did still make some money on the trade.

At the reduced price, the CB attracted about 50 investors, who were mainly from Europe. Particularly at the top end of the book, the number of European funds clearly outweighed the Asia-based accounts. There was also some participation from offshore US investors. There is stock borrow available in the market, but traditional hedge funds were less interested in the deal since it came at quite a low implied volatility.

The deal was offered with coupon and yield between 0.875% and 1.875%, but once it was reoffered the yield was pushed up to 2.087%. That went down well with the European funds who considered it a good yield for a credit that is viewed to have limited downside because of its government links – and hence a good CB to hold on to for the longer-term. Keppel is owned by Temasek Holdings, which in turn is wholly owned by the Singapore government.

Given the re-offer, the terms were obviously also fixed at the best end for investors, with the coupon at 1.875% and the conversion premium at 33% over yesterday’s closing price of S$5.05. The premium was initially offered in a range between 33% and 43%. The latter does look quite ambitious and even without last week’s share price rally it is difficult to see investors agree to a 43% premium. Even at 33%, this is the highest premium for a Singapore dollar-denominated CB since CapitaLand’s S$1.3 billion offering in February 2008, which featured a 46% premium. That bond came with a 3.95% coupon, however.

The other two Singapore real estate-linked CBs this year – by CapitaCommercial Trust and Ascendas Reit – came with premiums of 20% and 25% respectively.

Analysts at Barclays Capital said in research report that they view the Keppel bond as attractive at the reoffer price. However, they recommended investors to instead buy the existing Keppel 2013 CB with a put in 2011, as it has similar equity sensitivity but offers a higher running yield of 2.1% and a lower conversion premium. That bond is now trading at fair value, they estimated.

The Keppel CB has no put, but an issuer call after three years, subject to a 130% hurdle. Most investors used a credit spread of 150bp to 175bp, which compare with outstanding five-year credit default swaps on fellow Singapore real estate developer CapitaLand, which trade at about 175bp to 195bp. Both companies have links to the government, but Keppel has a lower gearing than CapitaLand and so should potentially be viewed as a stronger credit.

The CB offers dividend yield protection at the highest of three different scenarios: a 1.05% yield, a 35% payout ratio and an absolute yield of S$0.05 per share. At present the 35% payout ratio is the highest and translates into a dividend yield of just over 2%. The stock borrow cost was assumed at about 0.5%.

At a credit spread of 150bp, the bond floor ended up at 94.7% and the implied volatility at about 19%, while at a spread of 175bp the bond floor would come down to 93.7% and the implied vol would be around 21%. Once you take the reoffer into account, the implied vol would drop below 20% at either spread.

The Keppel transaction was jointly arranged by Goldman Sachs and HSBC.