DHT and Scorpio find technique to tackle bond refinance conundrum
Private exchange presents a flexible option when bonds mature in down market, writes Park Partners’ Aran Williams
The issuance of convertible bonds is running at high levels this year, topping $85bn in the US in the first half — the most since 2008. Issuers tend to be tech companies, whose volatile share prices imply high option values and allow the convertible bond to be priced attractively, with low coupon rates often below 1%.
There are not many parallels between the tech and tanker industries, but tanker owners too have volatile share prices and a strong desire to keep cash interest payments as low as possible in today’s brutal spot market.
The challenge with convertible bonds in shipping is what to do when the maturity coincides with a low market. Issuing new capital is unattractive, as shares are trading at steep discounts to net asset value (NAV), and the yields necessary to find new unsecured bond investors are high.
Scorpio Tankers and DHT Holdings, two US-listed issuers facing 2019 convertible bond maturities, have used a little-understood technique to extend the maturities beyond 2020, when the markets should hopefully look materially better.
Rather than raising new capital to repay a maturing bond, the technique involves privately negotiating with existing holders, so that they agree to exchange their bonds for a new, slightly more valuable bond, with a longer maturity date.
“The challenge with convertible bonds in shipping is what to do when the maturity coincides with a low market”
This cannot be done for the whole bond issue, as that would require a full public tender offer under US Securities and Exchange Commission rules, but by following certain protocols, it is possible to exchange a high percentage of a bond issue in a private transaction.
Scorpio Tankers exchanged $200m of its $350m issue, and DHT exchanged $75m of its $105m outstanding, in both cases for bonds with longer maturity dates. The remaining stubs of the old bonds are much smaller and more manageable to repay in cash on maturity.
This mechanism has several other advantages.
First, the issuer does not have to make a public tender or public capital raise. The deal is negotiated privately without alerting the market that the company is looking for funds and is announced only once it is completed.
Also, the company is able to keep control over the amount of bonds exchanged and the relative size of the new and old bond issues.
Finally, the company has a greater degree of flexibility in terms of the new bond, as the terms are negotiated privately with existing holders. For example, both DHT and Scorpio Tankers’ new convertible bonds have a much higher conversion price premium than the standard market 30%. If a company believes its shares are trading at a wide discount to NAV, it is certainly not attractive to issue a new convertible bond with a 30% conversion premium, if that conversion price is still below the company’s NAV.
The issuer also has more flexibility in the date of maturity. Rather than a standard five years, Scorpio Tankers and DHT have opted for a relatively short maturity date. DHT has also included issuer-friendly redemption clauses that limit the eventual cost to shareholders of the convertible bond if the share price appreciates strongly.
The principal attraction of convertible bonds — low interest due to the equity convert option — persists. The flexibility offered by private exchange reduces the refinancing risk, making it suitable for other shipping companies looking to minimise the cost of capital and manage their capital structure through the cycle.