‘Top Glove’s bonds not likely to impact borrowings’
KUALA LUMPUR: Top Glove Corporation Bhd’s (Top Glove) recent issuance of exchangeable bond is not expected to impact the group’s borrowings, analysts opine, while others believe the arrangement allows bondholders to immediately lock in Top Glove’s share price if it starts to perform.
In a filing on Bursa Malaysia, Top Glove announced that the company had successfully priced its maiden exchangeable bonds in the principal amount of US$200 million (estimated around RM814.1 million) on February 20, 2019.
“Following the issuance of US$200 million in principal amount of the bonds, the bonds issue was completed on March 1, 2019,” the statement read.
The bonds were listed on Bursa Securities under the exempt regime and on Singapore Exchange Securities Trading Ltd on March 4, 2019.
“The issuance of exchangeable bond is not expected to impact the group’s borrowings and its gearing ratio as it will be used to retire existing debt,” the research arm of Public Investment Bank Bhd (PublicInvest Research) said.
“With this issue, the group intends to save approximately 50 per cent of the existing interest costs for these borrowings, which will translate to cashflow savings of RM16 million per annum.
“Considering that the coupon rate is fixed at two per cent per annum, the group will thereby limit its exposure to any future fluctuations in London Inter-bank Offered Rate (LIBOR).”
Although the bonds are embedded with a convertible feature, however, PublicInvest Research did not expect any immediate dilution of earnings since the conversion of shares should only take place when the exercise is in the money, as share price trends above RM6.20.
Meanwhile, Top Glove’s recently concluded US$200 million exchangeable bond issue actually comes with a “stock borrow arrangement” where Top Glove controlling shareholder Tan Sri Lim Wee Chai lends bondholders Top Gloves shares to the tune of 2.1 per cent of Top Glove’s outstanding shares – translating to about 54 million shares – allowing them to short sell the stock.
“Recall, the bonds are convertible into 131.2 million new Top Glove shares at a ratio of 656 new Top Gloves shares for every US$1,000 bonds surrendered at a fixed exchange rate of RM4.0703 per US dollar, translating to an effective exercise price of RM6.204,” said AmInvestment Bank Bhd (AmInvestment Bank) in a separate note.
“We believe the arrangement allows bond holders to immediately lock in Top Glove share price if it starts to perform (i.e. surpasses the RM6.204 exercise price).
“For instance, if Top Glove share price is to hit RM6.50, the bondholder could sell the borrowed shares at RM6.50 in the open market, and subsequently convert its bonds into new Top Glove shares at RM6.204 to return to the lender, effectively locking in the targeted return on his or her investment in the bonds.”
According to AmInvestment Bank, the arrangement will effectively increase the free float of Top Glove shares by 2.1 per cent, which may be perceived as “share overhang” under a weak market condition.
“Nonetheless, it should not affect the fundamentals of the stock. There are no additional shares being issued, and hence no earnings per share (EPS) dilution.”
All in, AmInvestment Bank maintained its ‘buy’ call on Top Glove with a fair value of RM6.34 per share, based on discounted cash flow (DCF). On the other hand, PublicInvest Research maintained its ‘neutral’ call and target price of RM5.70 per share.
Following the issuance of US$200 million in principal amount of the bonds, the bonds issue was completed on March 1, 2019. Top Glove