Temasek Holdings returned to the equity-linked markets last night, raising S$500 million ($390 million) worth of bonds exchangeable into Hong Kong-listed Li & Fung. The deal came less than two months after the Singapore investment company sold S$800 million worth of exchangeable bonds (EB) into Standard Chartered and was clearly designed to take advantage of the strong demand for that first transaction.
This latest EB has a similar structure, including a blue-chip underlying and a zero percent coupon and yield, but it matures in just two years compared to three years for the earlier deal. It also has a higher premium and sources said last night that the pricing was a bit more aggressive this time around. However, Li & Fung is a fairly volatile stock with plenty of stock borrow available, so investors didn’t seem particularly concerned about that. Also, the downside is limited as the bond floor at the final terms is about 97%, according to CB specialists.
But the key selling point for the transaction — like last time — is the fact that Temasek is a triple-A rated credit, which is a rarity among Asian equity-linked issuers. It is also an infrequent issuer, although that point is getting somewhat less valid now that it has done two deals in the spate of a couple of months. If it were to do a third transaction, investors may well lose the sense of urgency to invest in each of these deals.
However, in light of the sell-off in global equity markets since August and the continued volatility, investors are really only interested in hedgeable deals that are backed by a strong credit, such as Temasek. So it may well continue to tap this source of funds through more bonds exchangeable into various underlying stocks. With an investment portfolio that amounted to $150 billion at the end of March and which includes stakes in numerous listed companies, it certainly has a lot of possibilities.
According to investors, bankers have been sounding the market in recent weeks to gauge the level of demand for more equity-linked issues from Temasek.
The Reg S bonds were offered with no coupon and no yield, and an exchange premium of 37% to 43% over Li & Fung’s closing price of HK$16.98 yesterday. The premium was fixed just above the mid-point at 40.165% for an initial exchange premium of HK$23.80 — a price that Li & Fung last traded above in January (adjusted for a two-for-one share split in early June). Since then, the stock has been on a pretty steady decline, although it has rebounded after hitting a 2011 low of HK$11.58 in early October, mirroring the performance of the overall market. Year-to-date the stock is down 25%, compared to a 16% decline in the Hang Seng Index.
Given the short maturity of just two years, the bonds have no put and no issuer call, except for the usual clean-up and tax calls. They come with a S$100 million greenshoe option that can be exercised within 30 days.
The issuer is the same as last time, namely Temasek Financial (III), which is wholly-owned by Temasek. And, also like last time, the bonds are guaranteed by Temasek Holdings.
According to a source the deal was about 2.5 times covered when the order books closed after approximately three hours. The buyers were said to comprise a mix of outright investors and hedge funds and be split between Asia and Europe. The offering was not open to onshore US investors.
Another indication that investors liked the deal is that the bonds were said to be indicated slightly above par in the grey market last night, at around 100.25, although it was unclear whether there was any actual trading. The key test will come when Li & Fung starts trading in Hong Kong today.
According to an investor, the bonds were marketed at a credit spread of 95bp, which compares with 110bp for the EB into Standard Chartered and reflects the slight improvement in the debt market during the past month. The stock borrow cost was assumed at 50bp and investors will be protected for dividends that exceed a 1.5% yield.
As noted, this gave a bond floor of about 97% and an implied volatility of around 29%. The historic volatility is said to be in the mid-30s.
Like last time, Temasek didn’t specify how it plans to use the money raised, saying only that it will be used to fund the ordinary course of business for Temasek and its investment holding companies.
However, the fact that it has now done two similar transactions seems to reinforce the belief that Temasek is using the equity-linked market as an alternative to the short-term loan market. Since the bonds pay no interest, they are a significantly cheaper source of funding than a bank loan and even if they were to be exchanged into equity, it will have no impact on Temasek’s own capital structure. The two deals done so far are also exchangeable into a very small portion of Temasek’s overall equity holdings. The October EB accounted for only about 4.2% of Temasek’s 18% stake in Standard Chartered, ie less than 1% of Standard Chartered’s share capital overall.
Last night’s trade accounts for a bit more than half of Temasek’s shareholding in Li & Fung, but it only owns about 3%, so that too is a small stake. Li & Fung is a Hong Kong-based trading and supply chain management company that sources raw materials and products for major global brands through its network of more than 15,000 suppliers.
The exchanageable bond was arranged by Credit Suisse.
