Thursday, January 10, 2008


IOI A Shining Example

Finance Asia - IOI Resources became the first company globally to issue equity-linked bonds in 2008 when it launched and priced a highly anticipated exchangeable into Malaysian palm oil producer IOI Corp.
While undoubtedly helped by the rising palm oil prices and the fact that investors have made money on two previous exchangeables into IOI, the demand was nevertheless impressive and suggests investors are ready for more CBs. While the credit environment hasn’t changed much since the significant widening at the end of the third quarter, investors and issuers are now coming to terms with the fact that spread levels may have been too tight before and that current levels may be the new reality. Instead they have started to focus on high volatility, which is something CB investors like and want exposure to. The IOI bonds were launched at an initial size of US$500 million but after attracting about US$3 billion worth of demand, the upsize option was exercised in full for a total deal size of US$600 million. About 120 investors participated in the deal, many of whom bought on an outright basis. The bookrunners were also able to push the yield all the way to the tight end of the 1.25% to 2.25% range, which is significantly lower than the 3% IOI achieved on its previous US$370 million exchangeable in December 2006. The exchange premium was fixed at launch at 30.18% over yesterday’s close for an exchange price of RM$11. The pricing and the demand shows that the company - and Citi as the sole bookrunner - made the right choice not to go ahead with this deal in December even though everything was ready. By waiting, they have been able to capture the positive momentum in the palm oil sector that has been triggered by crude oil prices touching $100 per barrel last week. The company had the luxury to wait for the right opportunity as it had no specific use for the money raised. According to the term sheet, IOI Resources intends to lend all of the net proceeds to IOI Corp and its subsidiaries to be used for capital expenditure, investments and acquisitions as well as for working capital and other general corporate purposes. The bonds, which are guaranteed by IOI Corp, have a five-year maturity but can be put back to the issuer at the third anniversary. There is also an issuer call after two years, subject to a hurdle of 130%. The bonds will pay no coupon and were issued at par.
Comments - The deal was very significant for a variety of reasons. Besides being in the right sector, it was also regarded as the "safest" and best play into palm oil. The fact that IOI Corp had been exemplary in transparency issues, had effective yield management and a very sound global expansion strategy and execution team: caused a stampede for the CB. How many Asian companies can have those kind of boasting rights. Even Sime Darby would not have been able to get away with such low rates.

The conversion price at RM11 is rather high but does not seem to bother the plentiful funds clamouring for the papers. That would be a very strong hint on the upside in store for IOI Corp, currently hovering above RM8 only. Looking at the very low yield, obviously the buyers are very optimistic that its the conversion into equity which would be most attractive, they obviously did not buy for the yield.

What IOI Corp basically did was "issuing new shares" @ RM11 in effect when their share price was just above RM8, and in USD which is the right currency to issue in (hedge or unhedged). That would also hint that the funds would be use to widen their expansion and acquisition into the US (which has not yet been conquered by IOI Corp).

There are so many basic but insightful business lessons for all Asian companies, in particular Malaysian companies. Too many have been too complacent just getting listed - that is pathetic. Malaysia with about 30m population is just too small. Good companies should take the strategy of gradual expansion exemplified by KNM, IOI Corp, IJM, Maxis ... to name a few. Its the fear of the unknown, or sub-standard management thinking. When the going is good, take advantage to expand wisely not recklessly. Its very sad when the index has surged from 1,000 to nearly 1,500 in 2 years and we still see many local companies playing around with local assets or waiting around for domestic projects.

Citigroup advisors are to be applauded for having the foresight to withold the deal tilll now instead of doing it in November or December. Those are the fees worth paying for.

6 comments:

sam chong said...

Dear Dali,

CB conversion price at RM11 means the holders are expecting IOI price to reach RM14-RM15?

IOI has a call option after two years to redeem the CB should its price is 130% more than the conversion price. Why?

Thanks

Salvatore_Dali said...

chong,

first question, well probably so assuming a 2-3 year holding period... must remember that the previous similar bond by IOI saw the share px more than doubling which made for a lot of happy investors

second question, it just makes sense, a clean up tactic... if after 2 years it reaches that level, there should be a lot of conversion already, you dont want to drag out the issue when only 5%-10% still have not converted... maintenance cost

juicy said...

dali ,
how about doing a share buyback when the market is depress then flock it back to bondholders

Salvatore_Dali said...

juciy,

that doesn't work... cos the bond holders could very well have bought now, and I am sure they do ... its a BOND thing, these are bond funds not equity funds... they just want some yield and some equity play...

sam chong said...

Dear Dali,

Any comment on the below. Would there be any change to IOI's profile?

"NSINGAPORE: Finland refiner Neste Oil said today that it would buy most of the palm oil feedstock for its Singapore biodiesel plant, due to start in 2010, from Malaysian plantation firm IOI Corp. The main supplier for us will be IOI and we have an agreement for several years with them, Risto Rinne, president and CEO of Neste Oil, told reporters during a visit to Singapore. - Reuters"

Thanks

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