UOB yesterday took a big step towards reducing its stake in United Overseas Land (UOL) with a combined share placement and exchangeable bond. UOB currently owns 35% of UOL and by law must reduce this holding down to below 10% by July 2006.
The share placement will take the form of a special dividend of UOL shares to be paid out to UOB shareholders. For every 1,000 shares of UOB they own, they will receive 100 UOL shares. The pricing of the trade will have to be approved at an EGM before the distribution can take place. The dividend will comprise 153.8 million shares and represents 19% of UOL.
At the same time as announcing the dividend, the bank also completed a S$276.25 million exchangeable bond, representing a further 15% of UOL, or 121.7 million shares. The bonds have a maturity of only nine months and carry an exchange price of S$2.27, a 3.65% premium to the reference price. The bonds have a zero coupon and a yield of 1.5%.
With a six-month hard no-call, the short maturity of the trade gives UOB time to work out what to do in the event that the bonds are not exchanged on the maturity date of 12 January. However, given the slim premium and easy terms, these bonds are structured to exchange. Listed on the SGX, the bonds were sold by sole bookrunner CSFB under Reg S. Fees were not disclosed.
CSFB structured the bonds with the following assumptions: a 20bp credit spread over Sibor; a borrow cost of 5%; volatility of 14%; and a dividend yield of 3%. Together these give a bond floor of 99% and a fair valuation of 101.5%. CSFB provided an asset swap for around half of the deal.
The bonds were said to have been sold in two hours to 30 accounts. 55% of these were Asian, 25% offshore US and 20% European. They were all said to be equity-linked specialists.
Observers have all been relatively complimentary about the trade. "I can't criticize it really," said one rival equity-linked banker. "All in all it's not bad. I think they clearly learnt their lesson from the last deal," he said, referring to a UOL into UOB exchangeable that CSFB did in December 2004, which had to be repriced at 98.5% down from 100%.
The current deal did trade up quite quickly in trading yesterday, being bid at 101.375% at lunch time, suggesting that perhaps this deal had been sold cheaply. Still, given the financial scars from the last exchangeable it is understandable that CSFB erred on the side of caution.
Nevertheless, the UOL stock held its value once the bonds were sold, only trading down by about 1.5%. The market might now be wondering if UOL is in play. With UOB's stake cut to 12% by this exercise, the property company could become a target. Temasek made a bid for the company last year and with the huge growth in the Reit market in Singapore, many players have the will and the resources to buy up premium assets such as UOL.
It was perhaps the expectation of good performance from the Singapore property market that allowed this deal - with the equity from UOL and credit from UOB - to perform so much better than the previous deal.
