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Monday 7 December 2009
Olam advisers lose fees in US$400m bond issue
Olam International had trouble selling US$400 million of convertible bonds in early September because convertible arbitrage funds could not borrow Olam stock for shorting, said the company’s chief executive, Sunny Verghese.
Lack of borrow stock saps demand from convertible arbitrage funds
By CHEW XIANG 07 December 2009
Olam International had trouble selling US$400 million of convertible bonds in early September because convertible arbitrage funds could not borrow Olam stock for shorting, said the company’s chief executive, Sunny Verghese.
Lead managers JP Morgan and Standard Chartered lost all of their fees when they had to re-offer the seven-year issue at 98 later that month.
‘It was a completely undoable deal with the initial terms because assumptions were out of whack with reality,’ one fund manager was quoted as saying in IFR Asia magazine.
The coupon at launch was 5.4 per cent, and the conversion premium was 28 per cent.
Mr. Verghese told BT last week that this had to be narrowed to 6 per cent and 25 per cent before the issue could be cleared.
‘The moment we made this mid-course correction, it just took off. The long-only funds were happy to mop it up at that pricing,’ he said.
Temasek Holdings, which bought 14 per cent of the commodity supply chain manager in June, subsequently bought an additional US$100 million in convertibles by taking an upsize option on the same issue.
Mr. Verghese said that at launch on Sept 2, the advisers priced in a stock borrow cost of 2 per cent but ‘they suddenly found that stock borrow was mopped up, somebody cornered all the borrow’.
To hedge themselves, convertible arbitrage funds typically borrow the company’s underlying stock for shorting.
‘When there was no traction coming from the convertible arbitrage funds, the issue started facing significant challenges,’ Mr. Verghese said.
He added that the deal was hard underwritten, so the company faced no risk - the placement agents would have to buy up the offer if they couldn’t sell it.
He refused to speculate on the reason for the spike in stock borrow costs, but some fingers have been pointed at rival banks competing for the same mandate.
Other reports blamed the lack of interest on poor pricing compared to reference bonds from fellow commodities trader Noble Group.
‘But if you look back at this in hindsight, today the bonds are trading at 109, 110, 111, which means the pricing was exactly right, the 5.4 per cent and 28 per cent premium,’ Mr. Verghese said.
The convertibles are now trading at a bid/offer of 113.5/114.1, according to Bloomberg data.
Olam has been moving aggressively in the bond market in the past 18 months. Last July, it sold US$300 million of one per cent convertibles - one of the last issues before the financial crisis hit Asia.
But within months, the bonds were trading as low as 46, as funds sold their holdings indiscriminately, while there were concerns that Olam was over-geared.
In early December last year, the company offered to buy back US$150 million, eventually paying 65 in the dollar for US$118 million of bonds and booking a S$56 million profit.
It subsequently made another offer in February to exchange outstanding bonds at 78 per cent of their face value for new bonds with a higher coupon and put price. Olam gained over S$80 million from the bond buy-back exercises.
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Olam advisers lose fees in US$400m bond issue
Lack of borrow stock saps demand from convertible arbitrage funds
By CHEW XIANG
07 December 2009
Olam International had trouble selling US$400 million of convertible bonds in early September because convertible arbitrage funds could not borrow Olam stock for shorting, said the company’s chief executive, Sunny Verghese.
Lead managers JP Morgan and Standard Chartered lost all of their fees when they had to re-offer the seven-year issue at 98 later that month.
‘It was a completely undoable deal with the initial terms because assumptions were out of whack with reality,’ one fund manager was quoted as saying in IFR Asia magazine.
The coupon at launch was 5.4 per cent, and the conversion premium was 28 per cent.
Mr. Verghese told BT last week that this had to be narrowed to 6 per cent and 25 per cent before the issue could be cleared.
‘The moment we made this mid-course correction, it just took off. The long-only funds were happy to mop it up at that pricing,’ he said.
Temasek Holdings, which bought 14 per cent of the commodity supply chain manager in June, subsequently bought an additional US$100 million in convertibles by taking an upsize option on the same issue.
Mr. Verghese said that at launch on Sept 2, the advisers priced in a stock borrow cost of 2 per cent but ‘they suddenly found that stock borrow was mopped up, somebody cornered all the borrow’.
To hedge themselves, convertible arbitrage funds typically borrow the company’s underlying stock for shorting.
‘When there was no traction coming from the convertible arbitrage funds, the issue started facing significant challenges,’ Mr. Verghese said.
He added that the deal was hard underwritten, so the company faced no risk - the placement agents would have to buy up the offer if they couldn’t sell it.
He refused to speculate on the reason for the spike in stock borrow costs, but some fingers have been pointed at rival banks competing for the same mandate.
Other reports blamed the lack of interest on poor pricing compared to reference bonds from fellow commodities trader Noble Group.
‘But if you look back at this in hindsight, today the bonds are trading at 109, 110, 111, which means the pricing was exactly right, the 5.4 per cent and 28 per cent premium,’ Mr. Verghese said.
The convertibles are now trading at a bid/offer of 113.5/114.1, according to Bloomberg data.
Olam has been moving aggressively in the bond market in the past 18 months. Last July, it sold US$300 million of one per cent convertibles - one of the last issues before the financial crisis hit Asia.
But within months, the bonds were trading as low as 46, as funds sold their holdings indiscriminately, while there were concerns that Olam was over-geared.
In early December last year, the company offered to buy back US$150 million, eventually paying 65 in the dollar for US$118 million of bonds and booking a S$56 million profit.
It subsequently made another offer in February to exchange outstanding bonds at 78 per cent of their face value for new bonds with a higher coupon and put price. Olam gained over S$80 million from the bond buy-back exercises.
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