Companies seize chance to secure cheaper funds

PHOTO: Companies seize chance to secure cheaper funds

NO ONE likes to pay a higher interest rate on borrowed money than is necessary, and big companies that raise funds by selling bonds are no exception.

For several financially powerful companies, recent bond market turmoil has meant a golden opportunity to buy back debt at an attractive price using money raised earlier at a cheaper rate.

At the same time, these companies have been able to give investors left jittery at volatile bond prices a big shot of confidence.

Companies sell bonds to investors to raise funds and pay them a regular fixed dividend or "coupon" rate. The bonds are listed on the Singapore Exchange.

In the past fortnight, OCBC Bank and CapitaLand have led the way by offering to buy up almost $1.8 billion worth of debt which they had issued to bolster their balance sheets during the global financial crisis five years ago.

Essentially, they have redeemed existing bonds with funds raised earlier at a lower cost. This has spurred hopes that other similarly well-capitalised companies will follow in their footsteps.

Mr Clifford Lee, head of fixed income at DBS, said: "This is a good time for companies with strong credit to buy back their debt. The bond market is choppy because of interest rate volatility. Companies are fundamentally sound."

It is a big contrast from the dark days of the 1998 Asian financial crisis when companies tried hard to hoard every drop of liquidity as investors stampeded for the exit given the big number of corporate bankruptcies, he said.

These big buy-backs, which come with sweeteners, give jittery bond-holders some confidence, which feeds through to steady the nerve of stock investors.

In the past three days, OCBC has risen 3.1 per cent, and CapitaLand has gained 3.5 per cent, with both of them outperforming the benchmark Straits Times Index which climbed 2.65 per cent, as the market rebounded.

Of the two major debt redemptions so far, OCBC's is simpler. It said last week it would redeem $1 billion of preference shares - a bond-like instrument which gives its holders a fixed dividend of 5.1 per cent but no voting rights - issued in July 2008.

It would finance the repayment with the proceeds from another preference share issue it had sold last year which offered a lower 4 per cent dividend payout.

CapitaLand's debt reduction exercise is more complicated, as it spends almost $800 million to buy back some convertible bonds it had issued during the global financial crisis five years ago.

The funds for the buy-back came mainly from money the firm raised from a $650 million seven-year convertible bond issue, just before turmoil struck the bond market late last month. It carried a coupon of 1.85 per cent.

Mr Arthur Lang, its group chief financial officer, said: "We are pleased that CapitaLand successfully conducted this concurrent issuance of new convertible bonds and buy-back of existing convertible bonds from the market."

The objective is to refinance debt issued earlier at higher coupon rates with a lower one - and cut debt servicing costs, while lengthening the maturity profile of the debt, he added.

CapitaLand used the proceeds to buy back $432.5 million of an earlier convertible bond bearing a much higher coupon rate of 3.125 per cent which matures in 2018, via a tender offer.

To entice bond-holders to part with their bonds, it offered them an 11.5 per cent premium on the par value of their bonds.

It also bought back $229 million of another convertible bond issue, which carried a 2.875 per cent coupon rate that would mature in 2016, offering bond-holders a 9.441 per cent premium on the par value of the bonds.

For CapitaLand investors, the icing is getting a premium for their convertible bonds if they accept the property giant's offer. It is also a win-win situation for the company as well, since the bond market turmoil might have lowered the premium it had to pay to repurchase the bonds.

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