So far this year, the Federation has yielded just one other equity offering from Time.com and last year only two deals, from Digi.com and Malaysian Pacific Industries Berhad. For convertible investors, the deal also represents their first taste of equity-linked paper since a $200 million exchangeable by Rashid Hussain in June 1997, some four years ago.
However, the illiquidity of Malaysia's equity markets, restrictions on short-selling and the strength of Asia's credit markets, mean that the deal is very heavily fixed income oriented. As one observer puts it, "Convertibles with the combination of coupon and investment grade rating are just flying out of the door at the moment. Those with zero coupon structures are proving more difficult."
Terms comprise a five-year bullet maturity, a coupon of 2% to 2.5%, conversion premium of 16% to 22% and yield to maturity of 6.10% to 6.60%, to give a spread of 150bp to 200bp over Treasuries. With a $25 million greenshoe, the deal is also callable after year two subject to a 120% trigger and has premium redemption in year five at 120% to 127.06%. There is no put option, but the deal does have a downward re-set in year two and four, subject to a 90% floor, which lowers the effective conversion premium. With a Luxembourg listing, the deal will be placed under rule 144a.
Underlying terms comprise a bond floor in the low 90's, implied volatility in the low 20's, fair value of 102% to 106% and a mid-point credit spread of 180bp over Libor. Books are scheduled to close at noon Thursday (Asian time) and pricing should occur shortly after.
Convertible analysts believe that the deal will prove popular with investors looking to diversify from the endless stream of tech-related issues from Taiwan. "The Taiwanese issuers all have slightly higher bond floors and higher yields relative to their shorter maturities," says one CB expert. "On the surface, an implied volatility of 16% at the cheap end makes YTL's valuation looks relatively undemanding, but obviously it's very difficult to extract value from it and investors will be sitting on a naked option."
The company's strong credit fundamentals and rarity value of its debt, on the other hand, are likely to appeal to fixed income investors. As of December 2000, YRL Power had a net cash position of $1.1 billion and an EBITDA to interest coverage ratio of 7.3 times. Debt to EBITDA stood at two times.
Although unrated, the company has an implied rating at the same level as Baa3/BBB-rated Tenaga, although analysts agree that the former's balance sheet is stronger on a stand-alone basis. Tenaga, for example, reported at debt to EBITDA level of 5.5 times as of end 2000 and an EBITDA to interest coverage ratio of 3.2 times. Both companies are rated Aa1 by Rating Agency Malaysia.
Bankers also argue that YTL's 21 year offtake agreements with Tenaga, through which it sells 70% of capacity, give it stronger credit fundamentals. "The robustness of its business profile stands it in very good stead," says one.
Compared to Malaysia's only other liquid convertible, YTL also offers investors some equity sensitivity and a higher yield. Telekom Malaysia's October 2004 convertible is currently bid on a yield of 5.876% and conversion premium of 156.4%.
Year-to-date, the stock has also outperformed the wider Malaysian market, falling only 6.05% to Tuesday's M$2.64 close, compared to a 12.354% decline in the Kuala Lumpur Composite Index.
