Indonesia's Bakrieland Development, which launched a $150 million convertible bond on Wednesday evening, got competition a day later when another Southeast Asian company, YTL Corp, launched a $350 million deal. In reality though, the two offerings catered to different types of investors -- YTL is a repeat issuer and one of Malaysia's top blue-chips with a market capitalisation of about $9.5 billion, while Bakrieland is a small-cap Indonesian property and infrastructure developer that was approaching the international capital markets for the first time. On Friday there were rumours flying around about the level of interest in the YTL deal, but, in the end, both deals were executed successfully and were placed in full with external accounts.
The YTL offering has been on the cards since December when the Malaysian investment holding company, which focuses in particular on the property, construction and infrastructure industries, re-filed with the regulators to issue a CB of up to $400 million. As a result, the issue was hotly contested by several investment banks and there was also a lot of soft sounding in the market in the week running up to the launch. This may have resulted in some market participants expecting slightly different terms than what was finally offered.
According to a source, the deal wasn't mandated solely based on price, and Credit Suisse, which arranged the deal together with domestic Malaysian bank CIMB, didn't in fact offer the most aggressive terms. Instead, Credit Suisse clinched the deal because of its private banking relationships with parties related to YTL.
That doesn't mean that the terms weren't aggressive, however, which was evidenced both by the fact that the deal priced at best terms for investors and by the fact that it traded down in the aftermarket. Late in Asian trading on Friday, the bonds were quoted at 98.75-98.95.
The bonds were offered by YTL Corp Finance (Labuan), but are exchangeable for YTL Corp shares. Technically this makes it an exchangeable bond, although for investment purposes, it will act just like a CB.
The bonds have a five-year maturity but can be put back to the issuer at par on the third anniversary. They are also mandatorily exchangeable after three years at the option of YTL, which is acting as the guarantor, subject to a 130% hurdle. They came with an upsize option of $50 million, which has yet to be exercised.
They were offered with a coupon and yield between 1.375% and 1.875% and an exchange premium of 20% to 25% over Thursday's closing price of M$7.48. After a four-hour bookbuilding on Thursday evening, the coupon was fixed at 1.875% and the premium at 20%. The bonds will be both issued and redeemed at par.
The bookrunners marketed the deal at a credit spread of 225bp over Libor. Some investors thought this was too narrow, although people close to the arrangers said they saw little resistance among investors related specifically to the credit. Potential buyers were more wary of the implied volatility, which at the final terms ended up at 20% -- above a historic volatility in the high teens. Other assumptions included a stock borrow cost of 5% (short-selling is prohibited in Malaysia) and protection for dividend payout ratios above 25%.
In the end, the deal was bought by about 40 to 50 investors, including some holders of YTL's outstanding CB, which will become puttable in May and is currently trading out of the money. The proceeds from this deal will go towards the buy-back of those bonds.
YTL made headlines earlier in the week as well when its wholly-owned subsidiary YTL Hotels & Properties bought Niseko Village from Citi for Y6 billion ($67 million). Niseko Village, which is located on the Japanese island of Hokkaido, is part of a collection of four ski resorts that are commonly referred to as Niseko. The resort, including the lifts and 155 hectares of leased ski mountain land, is part of the purchase, as is two 18-hole golf courses and the Hilton hotel.
The buyers of the exchangeable bond were almost exclusively international accounts and the great majority of the deal, or at least two-thirds, was taken up by outright investors with a smaller portion taken up by hedge funds. Given the concerns about the implied vol, this was not surprising. The deal was thinly, but fully, covered.
Bakrieland
The opposite was true for Bakrieland, which saw hedge funds take up about two-thirds of the deal, while outright investors bought just about one-third.
Sources said the fact that the deal was marketed for a day-and-a-half was instrumental in making investors confident enough to buy in. The underlying share price also performed well during the marketing, jumping 5.9% to Rp270 on Thursday. The stock retreated slightly on Friday to Rp265. The bonds were priced and allocated in the Asian afternoon.
The issuer also added to the comfort level by entering into an equity swap with the bookrunner to help create a synthetic borrow facility that will allow investors to hedge the equity option. There was no information on the size of the equity swap.
As reported earlier, the bonds have a five-year maturity, but can be put back to the company on the third anniversary at par. They also have an issuer call after three years, subject to a 130% trigger. They are marketed with a coupon and yield between 7.875% and 8.625% and a conversion premium of 20% to 25%. Credit Suisse was the sole bookrunner, making it two out of two for the bank in the CB market last week.
This deal too priced at best terms for investors with the coupon and yield (the bond is par in-par out) fixed at 8.625% and the conversion premium set at 20% over a reference price that will be based on the volume-weighted average price in the five days immediately following the pricing (starting today).
The implied volatility turned out at about 20% and the bond floor was 86%, assuming a credit spread of 1,300bp over Libor, a full dividend pass-through and a 1.75% stock borrow cost.
Total demand reached $205 million with about 30 investors participating.
Bakrieland, which was set up in 1990, is part of the Bakrie Group, one of Indonesia's largest conglomerates with businesses spanning oil and gas, mining, telecoms and plantations, as well as the property and infrastructure operations carried out by Bakrieland. The proceeds will be used for growth capital and to pay down debt.
