Despite the following and other rants, ‘Temasek’s S$650m issue of bonds exchangeable into StanChart shares was oversubscribed.”The order was $1.25 bn,” it was reported. I was not surprised.
Singapore Notes ranted, Stanchart shares are currently trading at £13.73 (yesterday’s quote); the highest level reached during last year was £19.75. The British £ has also taken a pounding, diving from S$2.90 to S$2 yesterday, a stomach churning plunge of 30%. Yahoo! Finance indicates today’s range will be £1.9907 – £1.9937.
So what fool (as in “fool me, hah?’) would bet that the Stanchart share price would go up 27% in 3 years’ time? That’s a tantalising return of 9% per annum, assuming the pound-euro correlation doesn’t get any worse. Reuters is reporting a sterling drop, as latest UK data adds to the gloomy outlook.
Juz look at the volatility of the share price. In the last 12 months, it has been up to £19.75. More than 27% from current prices. And in November 2008 it was trading around £8. Investors buying the bonds are betting that StanChart’s share price recovers within three years. Not an unreasonable bet, given the volatility of StanChart’s (and other banks’) share price in recent years. Interesting chart.
At worse, they lose their funding costs (if they borrow money to buy the bond) or opportunity costs (if they invest in cash or bonds) for three years. Their upside is 27%++.
To quote Reuters Breakviews, One part would be a zero-yield bond, with a face value of S$36. Assume lenders to triple-A rated Temasek normally demand a 1.8 per cent annual return, and the bond is worth around S$34.50 today.
The other part is a call option on Stanchart shares.
Plug the lender’s current price, its forecast 3.5 per cent dividend yield, and the implied volatility of Stanchart’s stock into an options calculator, and it looks to be worth S$4.50.
Put together, the two bits of paper have a total value of S$39 – some 8 per cent more than investors paid. Taz why the issue was oversubscribed.
Unlike me, the writer thinks it ain’t such a gd deal, But it’s probably not such a sweet deal. The value of the call option is inflated because Stanchart’s shares are twice as volatile as they were before the summer.
If the shares return to their steadier state, the option is worth closer to S$1, leaving the value of the whole package a little below the sticker price. I think volatility will persist.
‘The writer goes on to talk about the deal’s advantages for Temasek, For Temasek, there are obvious attractions. Even if all the bonds are exchanged for shares, it will retain a 17 per cent stake in Stanchart.
And if the shares don’t rise much, the fund will have borrowed S$650 million interest free.
But for all that, the savings are small. Say Temasek had simply borrowed directly from the bond markets. Over three years, its total interest bill would be less than S$40 million.
Moreover, the bond issue triggered a mini-rout in Stanchart shares, leaving Temasek with a paper loss on its remaining stake 10 times the size of the interest costs it saved.
Other than demonstrating its financial prowess, Temasek doesn’t have much to show for its wizardry. True but given the jitteriness of the markets, the shares would have fallen for other reasons. Banks are not the flavour of the month.