Developer OUE has become the latest issuer to join a convertible debt hot streak in Asia ex-Japan as the Singaporean property firm raised S$305 million ($233 million) from two bond sales on Tuesday.
In concurrent deals, the developer raised S$154.75 million from a five-year convertible bond and another S$150 million from an exchangeable bond of the same tenor, with OUE Hospitality Trust being the underlying entity.
The transaction marked Asia's first concurrent equity-linked issuance in 11 years, after South Korean construction company KCC’s three-tranche bond deal – convertible bonds backed by common shares and treasury shares, and exchangeable bond into Hyundai Heavy Industries – in October 2007.
This rare deal structure provided some flexibility to investors by offering two different ways of investing in the underlying equity, with OUE being an ordinary company and OUE Hospitality Trust being a real estate investment trust.
However, it certainly added to the challenge for the unrated first-time issuer, which set an aggressive target of raising the equivalent of nearly one-fifth of its market capitalisation of S$1.7 billion.
Also weighing against it is the fact shares in both OUE and OUE Hospitality Trust are fairly illiquid in the secondary market, making the new instrument extremely difficult to hedge.
In particular, OUE Hospitality Trust’s 100-day historical volatility of 14.8% was lower than the 19.6% for Suntec Reit, a directly comparable stock that raised a total of S$600 million from two separate convertible bonds in 2016 and 2017.
Still, OUE managed to get the deal done as investor sentiment in the equity-linked market improved significantly from last year. In particular, investors are more receptive to convertible debt issued by property developers after a long streak of issuance in January.
OUE also benefitted from rarity value since it is the only real estate company to issue convertible debt in Singapore besides CapitaLand and Suntec Reit.
Following OUE’s deal, total equity-linked volume in Asia ex-Japan reached $7.3 billion so far this year, already at par with last year’s full-year figure. Property developers accounted for 75% of the volume.
Dual-tranche
OUE’s five-year convertible bond, puttable after three years, was launched with a coupon range of 1% to 1.5% and a yield-to-put of 2% to 2.5%. Investors were guided with a conversion premium of 10% to 20% over the stock’s S$1.92 closing price on Tuesday.
The deal was fully covered at launch and it was not surprising that the final terms were set at the best-end for investors, including 1.5% coupon, 2.5% yield-to-put and a 10% premium that translated to a strike price of S$2.112.
Based on the final terms, the bond yield is about 101 basis points lower than OUE’s senior term note due 2020, suggesting OUE could save 1% in annual interest cost by offering the equity option that can be converted to 73.2 million shares, or 8.12% of the company’s existing share capital.
Similarly, the developer’s exchangeable bond into OUE Hospitality Trust was also priced at the widest end of the range. The five-year deal was priced with a 3% coupon and yield-to-put – against a range of 2.35% to 3% – and a 10% exchangeable premium that settled the strike price at S$0.957.
The exchangeable’s final yield represented a 50-basis point pickup to the convertible bond, but it was offset by a tighter dividend yield protection of 2%, while the convertible bond price adjusts for all dividend and extraordinary distributions. OUE Hospitality Trust yielded 5.94% based on Tuesday’s closing price.
One source familiar with the situation said overall demand for both tranches was similar. In terms of investor type, the exchangeable bond attracted slightly more outright demand due to its higher-bond floor and debt-like structure. The top five accounts were allocated about half of the deal.
The bonds were marketed at a credit spread of 190bp. Assuming a 50bp borrow cost, the convertible bond has a bond floor of 96.5% and an implied volatility of approximately 9.6%, while the exchangeable’s bond floor is slightly higher at 97.6% and the implied volatility is lower at about 8%.
OUE said the proceeds will be used for debt repayment and general corporate purposes.
HSBC is the sole bookrunner of the trade.
