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27-10-2011, 04:05 AM
Business Times - 27 Oct 2011
Hock Lock Siew
The pros and cons of Swiber's perpetuals
By SIOW LI SEN
SWIBER Holdings began marketing on Monday a proposed issue of $50 million perpetual preference shares with an indicative 8 per cent coupon or dividend, and targeted at private bank clients. The proposed perpetuals are sold at a minimum of $250,000.
So far the response is understood to be so-so, which is not surprising given the overall market uncertainty, though the company did sell in a day last week (Oct 19) a plain vanilla $60 million 5 per cent one-year debt.
But perpetuals - bonds which the company may never redeem - are more exotic debt instruments and take getting used to. Last month, Ezra Holdings, also an oil and gas service provider, canned its proposed issue of perpetual bonds citing market volatility.
Swiber's effort includes structuring several features to reassure potential investors, including a step-up of a further 2 per cent dividend if not called in the third year. This means the investor could get a 10 per cent dividend if the perpetual is not redeemed in the third year.
Additional protection came in offering another 2 per cent dividend in the event of a default. Investors also have the option to convert into ordinary shares in the event the company defers a second dividend or if it defaults on the dividend payment.
It seems, though, that instead of finding comfort, some found the 'default' features perplexing. Given that perpetual preference shares are still pretty new instruments here and not well understood, structuring event of default deterrents seemed to have confused investors further.
The confusion is not unsurprising. While the local banks have sold several tranches of perpetuals here, only two issuances have been launched by non-bank corporates - Hyflux and Cheung Kong Holdings.
Issuing perpetual securities helps beef up a company's balance sheet as it is regarded as equity and will bring down its gearing ratio. The dividends are paid out of retained earnings and do not add to the company's interest expense.
Swiber has said the proceeds will be used for general business purposes including financing vessels. The proceeds will help refinance at a much lower rate Swiber's sale and leaseback vessels which are costing about 16 per cent per annum in interest costs, and so should improve its cash flow somewhat. The company has 14 vessels under sale and leaseback and its off-balance sheet debt or operating lease commitment is about US$821 million, according to its FY10 annual report.
In a note last month, CIMB analyst Lim Siew Khee said that assuming Swiber can raise US$80 million (40 per cent of its market cap as proposed by the company) to restructure some of its sale-and-leaseback vessel arrangements, its net gearing could improve to 0.8 times from one time.
So are the perpetuals an attractive investment given the increasingly more risky economic climate? Private bankers say the increasing preference of clients is to have plain vanilla products.
Does this mean that investors won't bite? Or does it mean that as companies like Swiber try more innovative ways of raising money, they are running ahead of their investors?
One banker said the way to look at it is that if one is already a Swiber equity investor, holding its perpetuals is a move up the capital structure since these securities rank ahead of common equity. Put another way, if you're already an equity investor, you're not taking on more risk, though that is not entirely the whole story. With perpetuals, one is taking on liquidity risks since these instruments are not well traded in the secondary market - hence the convertibility feature.
Of course, whether one is considering the perpetuals or buying plain old Swiber shares, investors must first assess the potential of the company and the risks surrounding its business and the industry it is in. A good place to start would be the 309-page perpetual prospectus.
Hock Lock Siew
The pros and cons of Swiber's perpetuals
By SIOW LI SEN
SWIBER Holdings began marketing on Monday a proposed issue of $50 million perpetual preference shares with an indicative 8 per cent coupon or dividend, and targeted at private bank clients. The proposed perpetuals are sold at a minimum of $250,000.
So far the response is understood to be so-so, which is not surprising given the overall market uncertainty, though the company did sell in a day last week (Oct 19) a plain vanilla $60 million 5 per cent one-year debt.
But perpetuals - bonds which the company may never redeem - are more exotic debt instruments and take getting used to. Last month, Ezra Holdings, also an oil and gas service provider, canned its proposed issue of perpetual bonds citing market volatility.
Swiber's effort includes structuring several features to reassure potential investors, including a step-up of a further 2 per cent dividend if not called in the third year. This means the investor could get a 10 per cent dividend if the perpetual is not redeemed in the third year.
Additional protection came in offering another 2 per cent dividend in the event of a default. Investors also have the option to convert into ordinary shares in the event the company defers a second dividend or if it defaults on the dividend payment.
It seems, though, that instead of finding comfort, some found the 'default' features perplexing. Given that perpetual preference shares are still pretty new instruments here and not well understood, structuring event of default deterrents seemed to have confused investors further.
The confusion is not unsurprising. While the local banks have sold several tranches of perpetuals here, only two issuances have been launched by non-bank corporates - Hyflux and Cheung Kong Holdings.
Issuing perpetual securities helps beef up a company's balance sheet as it is regarded as equity and will bring down its gearing ratio. The dividends are paid out of retained earnings and do not add to the company's interest expense.
Swiber has said the proceeds will be used for general business purposes including financing vessels. The proceeds will help refinance at a much lower rate Swiber's sale and leaseback vessels which are costing about 16 per cent per annum in interest costs, and so should improve its cash flow somewhat. The company has 14 vessels under sale and leaseback and its off-balance sheet debt or operating lease commitment is about US$821 million, according to its FY10 annual report.
In a note last month, CIMB analyst Lim Siew Khee said that assuming Swiber can raise US$80 million (40 per cent of its market cap as proposed by the company) to restructure some of its sale-and-leaseback vessel arrangements, its net gearing could improve to 0.8 times from one time.
So are the perpetuals an attractive investment given the increasingly more risky economic climate? Private bankers say the increasing preference of clients is to have plain vanilla products.
Does this mean that investors won't bite? Or does it mean that as companies like Swiber try more innovative ways of raising money, they are running ahead of their investors?
One banker said the way to look at it is that if one is already a Swiber equity investor, holding its perpetuals is a move up the capital structure since these securities rank ahead of common equity. Put another way, if you're already an equity investor, you're not taking on more risk, though that is not entirely the whole story. With perpetuals, one is taking on liquidity risks since these instruments are not well traded in the secondary market - hence the convertibility feature.
Of course, whether one is considering the perpetuals or buying plain old Swiber shares, investors must first assess the potential of the company and the risks surrounding its business and the industry it is in. A good place to start would be the 309-page perpetual prospectus.
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