Tuesday, 18 June 2019

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Blue-chip Singapore developer CapitaLand reduced its interest payments on convertible bonds just as talk of tapering was gathering pace.

Workers install CapitaMall Trust signage on the facade of a new shopping mall in Singapore.

Source: REUTERS/Edgar Su

Workers install CapitaMall Trust signage on the facade of a new shopping mall in Singapore.

Singapore’s CapitaLand has been this year’s most active issuer of convertible bonds in Asia, but its commitment to remaking its capital structure has meant the property developer has not added to net supply of convertible bonds since July 2009.

CapitaLand, South-East Asia’s largest developer, showed a timely reading of the markets on May 20 this year, when it sold a S$650m (US$525m) seven-year CB through Bank of America Merrill Lynch and Credit Suisse days before comments from the US Federal Reserve sent yields soaring.

Investors thought the Fed was signalling an imminent slowing of the US’s bond-buying programme and began to change their pricing demands, based on expectations of rising rates.

Fortunately, CapitaLand also had launched a concurrent tender offer for some of its outstanding CBs to bring down its interest costs.

Through the tender offer, the developer bought back S$432.5m of the more than S$1bn outstanding in higher-paying 3.125% bonds due in 2018, slightly more than the S$425m it had first planned to buy back. The Credit Suisse-managed deal was one of the largest tender offers from an Asian issuer – certainly the largest in the region in five years – and came at a tight premium to its price in the secondary market.

High net-worth investors, who have always been good buyers of CapitaLand’s bonds and tend to hang on to the paper, needed some persuading to give it up. The company had to market the offer heavily to reach all its bondholders.

CapitaLand paid 111.5% of par for the tender, or about S$486.1m in cash. The bonds were trading at a price of about 110.5 at the time of the deal, putting the final offer at a premium of about 1.0%, or an annualised premium of 0.2%. Bondholders tendered S$619.75m.

CapitaLand had indicated it would pay a minimum of 109% of face value, but, on May 30, the company adjusted its pricing guidance to a range of 109%–112% and said it had received valid tenders for a principal amount of S$302.5m at an average price of 111.5%.

There was S$617.5m in face value of 2018 CBs outstanding following the buyback. Then, separately, CapitaLand bought back another S$60m of its 2018 CBs in the open market, reducing its outstanding paper to S$557.5m.

Meanwhile, CapitaLand’s new seven-year CB paid a coupon of just 1.85%, the lowest for a real-estate name in the region. The offering also allowed the issuer to push out its debt-maturity profile.

If its CB move was timely, CapitaLand showed on September 19 it could also act rapidly, reacting swiftly to a bounce in bond prices as the tapering that investors had feared did not come to pass.

At the time, the company was ready to launch a S$600m bond with a S$100m greenshoe, in case the Fed’s decision went its way. In the wake of the Fed’s announcement, CapitaLand imposed a trading halt on its shares to pave the way for an offering of the bonds in the afternoon and catch investors before a Hong Kong holiday the following day.

Not only was the deal increased to S$750m that night, it was increased again the following week to S$800m.

That offering, too, was intended to fund a tender offer for some of CapitaLand’s outstanding CBs at an even larger size. As the response to the offering proved better and faster than anticipated, CapitaLand decided to increase the size of the new deal so as to buy back more bonds, bringing the deadline for tendering forward a week in the process.

This time, CapitaLand announced a tender for three series of bonds that were maturing or putable in 2015 or 2016, creating price competition between investors and, theoretically, a lower clearing price for the issuer. The offer drew tenders of more than S$1bn from bondholders, through an offer process that Credit Suisse also managed.

The clearing price for its 2.875% bonds due 2016 was set at 105% of par, against guidance of 102%–106%. For the 3.125% bonds due 2018, the price was at 108% of par, the bottom of the 108%–111.5% range, and, for the 2.1% bonds due 2016, it was set at the floor price of 97% of par.

All in all, CapitaLand repurchased S$826.75m in principal amount of CBs, including S$0.5m of the 2.1% notes, S$504m of the 2.875% notes and S$322.25m of the 3.125% notes. It paid a total of S$880.6m, including accrued interest.

Following the repurchase, the company had S$424.25m outstanding of the 2.1% bond, S$467m of the 2.875% bond, and S$235.25mn of the 3.125% bond.

The final clearing prices of the tender offer were flat to the market price for the 2.875% CB due 2016 and, at 3.0% and 2.5% respective discounts to the market prices of the 2.1% CB due 2016 and 3.125% CB due 2018.

This was thought to be the first time in Asia that a tender offer cleared at or below the market price, and not only showed that CapitaLand could read the market, but that it could also balance its capital needs with investor demands.

To see the digital version of this report, please click here.

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