Thursday, September 20, 2007

Thoresen Thai issues CB with scarcity value

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A low premium and demand for Thai paper helps the shipping company to raise at least $140 million.
Integrated shipping company Thoresen Thai Agencies last night raised $140 million from the sale of convertible bonds which attracted strong demand particularly from Asia-based accounts.

This is only the second CB to be issued by a Thai company since late 2002, which gave it a definite scarcity value and observers note that this value was compounded because there are also very few CBs issued by the Asian shipping sector. From a diversification perspective, this bond was almost ideal and this was confirmed both by the level of interest and the low bond floor – which suggests investors were willing to pay a bit extra for the equity option.

It obviously didn’t hurt either that Thoresen Thai is regarded as a quality company and is experiencing strong demand for its shipping services. Listed in Bangkok, it ranks as Thailand’s second largest shipping company and one of the large-cap stocks in the Thai market, but in terms of its operations, it is widely viewed as an international player.

Established in Hong Kong in 1904 it now owns and operates a fleet of 45 general cargo vessels and dry bulk carriers. It also provides offshore oil and gas related services, including sub-sea contract drilling, through its 78%-owned subsidiary Mermaid Maritime, which the management is looking to spin off for a separate listing in Singapore, as well as a range of shipping related services such as ship brokerage and warehouse rentals.

According to a source, the base deal size was about four times covered and the book included not only mainstream CB investors, but a number of new accounts that are trying to build exposure to Thailand. Given the strong interest in the bonds and the current strength of the market, there is a good chance that joint bookrunners Macquarie Securities and Merrill Lynch will be able to exercise the $30 million greenshoe and increase the total deal size to $170 million.

About 83% of the demand came from Asia with the rest from Europe, according to sources. The bonds weren’t offered to onshore US accounts.

Investors weren’t willing to take the bonds at any price, however, which was evident by the fact that the yield to maturity was fixed at 5.5%, or at the wide end of the offered range of 5% to 5.50%. On top of that, they will also get a 2.5% annual coupon. The bonds have a staggered maturity date with one-third of the deal maturing after three years, one-third after four years and the final third after five years. This is an unusual feature for Asian CBs and was likely put in place to allow the issuer to spread the repayment risk over a longer period in case the bonds aren’t converted into equity.

That would seem unlikely though as the conversion premium is low, especially in light of the share price having more than doubled since the beginning of this year. The deal was launched with a fixed premium of 15% above the three-day volume-weighted average price of Bt52.09, which gave a conversion price of Bt59.90. The share price rallied 2.9% yesterday, however, as Asian equities were snapped up in the wake of the 50 basis point interest rate drop by the US Federal Reserve, which meant that the actual conversion premium is only 14.1% over the latest close of Bt52.50.

The share price is up 119% so far this year on the back of strong demand for dry bulk ships and rising freight rates. The Baltic Dry Index, which tracks the cost of moving dry-bulk cargo such as rice, sugar and grain, has almost doubled in the past 12 months. The stock dropped in line with the global equity markets in the first couple of weeks of August but has recovered almost all of those losses since.

The underlying assumptions included a credit spread of 325 basis points, a stock borrow cost of 5% and protection for the bondholders in case the divided yield goes above 2%. This gave a bond floor of 90.9%, which is low – especially for the third of the bonds that mature in three years’ time - but in combination with the low conversion premium, investors obviously felt that they could absorb that.

“This deal shows that there is significant investor interest in Thailand,” says one source close the deal.

The implied volatility was 24%, which compares with a historic volatility of 56%. However, the latter has been driven up by the August correction and the jittery market conditions globally since then, making it less useful as a valuation tool.

The bonds have no put option, but there is an issuer call after three years, subject to a hurdle of 130%.

While the scarcity effect obviously worked in favour of this deal, there are still a lot of concerns about the longer-term impact on the global economy from the US subprime crisis. Investors will have been well aware that a potential slowdown in economic growth could have negative implications for trade and in its extension for shipping companies. However, the latter was probably less in focus yesterday as the Fed rate drop was seen to have reduced the likelihood of a US recession, which shows that Thoresen Thai timed the issue well.

The company received approval from its shareholders to issue the bonds in mid-August, but held off on launching the deal because of the turbulence in the global credit markets. The company first announced its plan to sell CBs in early July.

The only other CB by a Thai company in the past three-and-a-half years came in July last year when hospital operator Bangkok Dusit Medical raised $110 million through a deal that was very well received. This bond, which was also arranged by Macquarie, was a bit different however in that it was denominated in US dollars but uses the Thai baht as the functional currency.

Thoresen Thai will use the money raised from the CB to refinance its secured long-term debt, which will allow it to fund a renewal of its shipping fleet as well as its wider expansion plan. A Thoresen Thai official said last month that the company pays an average of 7.7% on its outstanding debt of about $155 million.

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