Lead manager JPMorgan completed an upsized convertible for the world's fourth largest cruise operator on Wednesday. Both the convertible and the simultaneous rights offering are designed to ease pressure on the company's debt load, increase its freefloat and help fund the acquisition of two new vessels for $790 million.
The convertible in particular offers welcome diversification from Taiwan FIG and tech. And while the company is listed in Hong Kong, it is owned by the Genting group of Malaysia and as such joins an elite band of less than half a dozen equity linked deals from the country.
Having been initially sized at $135 million, with a $30 million greenshoe, the deal was upsized to $180 million and a $30 million shoe was exercised yesterday (Thursday). The transaction has a five-year maturity with no put options and two-year hard no call, thereafter subject to a 125% hurdle.
With a 2% coupon and redemption price of 120.136%, the deal yields 5.55%, roughly the mid point of its 5.38% to 5.88% range. The conversion premium was marketed at 24% to 29% and priced at 28% to the theoretical ex-rights price. This is in turn was set at a 10% discount to the stock's $0.33 close.
There is also a downward re-set after three years with an 85% floor. Co-leads are DBS, OCBC and UOB.
Underlying assumptions comprise a bond floor of 92%, implied volatility of 29% and theoretical value of 104.5%. This is based on a credit spread assumption of 350bp, zero stock borrow, zero dividend and 40% volatility assumption.
After marketing the deal for two-and-a-half hours, the book is said to have closed five times covered with participation by 71 accounts. By geography, it split 60% Europe, 35% offshore US and 5% Asia.
Early grey market pricing saw the deal trade up to 103% to 104%. Non-syndicate bankers believe it offers a solid high yield play with potential for the kind of spread compression few other Asian deals or markets currently provide.
Although the maturity is long for an Asian convertible, bankers add that the, "relatively high coupon and yield is appealing compared to most of the rest of the deals this year."
Bankers say two of the biggest challenges were convincing investors the bond floor would stick for such a volatile non-investment grade credit and getting them over the fact that most financing in the shipping sector is completed on a secured basis and this deal was not. Where the former is concerned, bankers report a wide degree of variance, with some houses quoting spreads as wide as 400bp over Libor and some as narrow as 320bp.
At the 350bp level, there was an asset swap book for about a third of the deal. Although Star Cruises is not rated it is said to be an implied BB rating.
Recent research reports cite the company's high gearing. At the end of 2002, it reported a 104% net gearing ratio. This will expand further as a result of the planned acquisition.
"Assuming Star Cruises seeks financing for banks for 80% of the cost," UBS wrote, "the planned capex will increase Star Cruises' debt by 29% to $2.8 billion (net debt of $2.6 billion from $2 billion)."
The equity portion of the financing, however, has been slightly higher and earlier than analysts had been anticipating. A number had expected a cash-call in 2004 on the back of improving fundamentals.
However, bankers argue that timing is still opportune because of positive momentum pushing the travel sector post SARs. Year-to-date, Star Cruises is up 13.79%.
The company's decision to subscribe in full to the rights offering should also help sentiment. This part of the offering sees the sale of 347 million primary shares on a seven for 100 basis.
Rights for the 15% freefloat are fully underwritten by the company and sub-underwritten by the syndicate. On full conversion and completion of the rights offering, the current freefloat will nearly double.
