Fundraising through convertible bonds

1
Fundraising through convertible bonds

• Coaltrans South Africa 2009

An Authorised Financial Services Provider
2
Introduction Convertible bonds
overview Indicative Terms Appendices
3
Introduction
Recent market activity has demonstrated
considerable appetite for hybrid equity
issuances

• Capital is in short supply, so it is expensive if
  it is available
• Users of capital either pay higher margins or
  issue equity
• Interest bearing senior debt where the interest
  is tax deductible is the cheapest form of capital
• Equity is issued where debt is not available
• Convertible debt is a hybrid between debt and
  equity cheaper than equity and more expensive
  than debt
• Convertible debt has a low cash cost and could be
  cheap if conversion never happens

4
Introduction

• Current capital market response
• the market response to the Aquarius Platinum
  Limited (Aquarius) convertible bond issue
  (April 2009) and indicative feedback from the
  marketing of the Anglo American plc (Anglo)
  exchangeable bond (August 2009) indicate strong
  investor appetite for hybrid equity instruments
• international market responses support the
  evidence seen in the local market
• The purpose of this presentation is to provide
  an overview of convertible bonds
• instrument overview
• indicative terms
• case studies

Recent market activity has demonstrated
considerable appetite for hybrid equity
issuances
5
Introduction Convertible bonds
overview Indicative Terms Appendices
6
Spectrum of capital instruments available
A convertible bond offers a number of advantages
to the issuer over straight debt and equity
funding
Convertible bond advantages
Convertible bond disadvantages

• Allows cash flow relief relative to term debt
  (lower coupon and bullet profile)
• Share price volatility monetised to reduce
  funding cost
• Soft and hard call options can provide issuer
  some dilution protection
• High level of structuring and pricing flexibility
• Greater quantum of funding may be available than
  vanilla debt
• May help maintain or improve credit rating
• Lower financial and cash flow risk
• Conversion premium allows issuer to obtain better
  equity issue value
• Increased pool of potential investors (debt and
  equity)

• Greater potential for equity dilution than
  vanilla debt
• Option value typically not fully discounted in
  pricing
• More complex than vanilla debt and equity
• Additional administrative burden
• Potentially complex tax treatment
• Complex accounting treatment
• Less flexibility than bank loans

7
Summary of terms for recent South African hybrid
issues
8
Introduction Convertible bonds
overview Indicative terms Funding
proposal Appendices
9
Convertible bond issue pricing
Convertible bond pricing components

• Main parameters used in pricing the convertible
• Volatility
• Conversion premium
• Issuer call
• Term to maturity also impacts option value

• The convertible bond coupon is determined by
  valuing the embedded equity option and deducting
  this from the coupon that would be paid on a
  vanilla bond.
• The primary factors affecting the pricing are
• Volatility of the underlying equity
• Conversion premium
• Terms of Issuer call option on the bond
• Maturity

Convertible
Debt

• The higher the volatility the more valuable the
  option and the lower the coupon
• Market soundings and past issuances indicate that
  investors will price in a significantly lower
  volatility to the actual share price volatility

Volatility of underlying equity

• The greater the conversion premium the lower the
  value of the option

Conversion premium

• To protect against giving away equity too cheaply
  through the convertible an issuer can often force
  conversion after a specified date if the share
  price increases by more than a specified
  percentage
• The longer the term the more valuable the option
  and the lower the coupon

Terms of issuer call option (soft call)
Maturity
10
Potential long-term savings of convertible bonds

• Any maturity share price below c.R115 will result
  in savings from the convertible bond over vanilla
  term debt
• If no conversion takes place - a permanent
  pre-tax interest saving of c.R38.7 million
• Key assumptions include
• Reference price R88.70
• Conversion premium 25
• Convertible rate 3m JIBAR 170 bps (midpoint of
  range)
• 3 year bullet term debt rate 3m JIBAR 3

Analysis of net present value benefit of
convertible bond savings1
PV of benefit (m)
Share price in 3 years time (R)

• Note
• This graph depicts the present value if
  conversion happens after year 3. If conversion
  happens before three years, the coupon savings
  will be less

• Based on the assumptions, the present value range
  of the pre-tax interest saving is as follows

11
Overview of redemption and conversion features
Convertible bonds usually have various redemption
and conversion features, including

• Redemption
• The Bond may have soft call features

Issuer soft-call

• issuer soft-call
• issuer hard-call
• deferred conversion rights
• standard conversion price adjustments

T0
T1
T2
T3

• The soft-call gives the issuer the right to
  redeem all Bonds outstanding at face value within
  a specified time period, subject to
  pre-determined share price performance the
  holder is given the chance to convert before
  redemption (forced conversion)
• Redemptions can be cash or in shares
• Conversion
• Face value divided by conversion price gives the
  number of shares into which each Bond can be
  converted
• The Bondholder has the right to convert each Bond
  into the shares within a specified time period
• The Conversion Price will be adjusted if various
  events occur which dilute the interests of the
  Bondholders these are standard for an
  instrument of this type

Conversion
Conversion price adjustments
T0
T1
T2
T3
12
Introduction Convertible bonds
overview Indicative terms Appendices
13
Case studies
RMB Morgan Stanley credentials
14
Strong investor appetite for equity-linked new
issues
Recent developments

• The recent resurgence of convertible bond
  transactions worldwide is showing broad appetite
  from yield-hungry equity and convertible outright
  investors alike
• The convertible bond market has seen 9.6bn of
  supply year-to-date, with close to 2.0bn in May
  and 2.35bn in June 
• In May and June, the market's appetite was
  successfully tested with supply of non-investment
  grade names (First Quantum, Q-Cells, Bulgari,
  Alliance) which highlights the depth of the
  market for primary supply
• Lessons learned from recent deals
• Demand has been overwhelming on recent deals
• The investment grade market is wide open, the sub
  investment grade market is open for select
  credits, equity stories and sectors
• The investor base is now 50 outright, 50
  traditional convertible arbitrage, of the 50
  arbitrage buyers, half are allocating to
  directional funds

Recent European equity-linked issues
100m and above, 2009-YTD(1)

• J Sainsbury 430m concurrent equity/equity-linked
  offering
• The marketing of the transaction was highly
  successful with the books multiple times
  subscribed within 2 hours of opening
• The common stock priced at a 6.6 discount to the
  previous closing price
• The convertible offering was priced with a 4.25
  coupon, below the tight end of the marketing
  range of 4.75-5.25
• Alliance Oil 385m concurrent equity/convertible
  bond offering
• The bond was marketed with a 6.75-7.50 coupon
  range and a 25-30 premium
• The transaction priced close to the mid point of
  the marketing range at 7.25 up 27.5
• This is the first Russian convertible to come to
  the market since November 2002

South African equity-linked issues

• Notes
• Shaded transactions denote offerings led by
  Morgan Stanley () denotes implied
  sub-investment grade offerings
• New Issue resulting from an exchange offer as
  part of overall restructuring premium based on
  April 27th closing share price when offer results
  were announced
• Mandatory Convertibles/Exchangeable

15
Highlights of recent equity-linked transactions

• Final phase of refinancing process after equity
  placement and rights issue
• The transaction was fully underwritten by RMB and
  shareholders were effectively granted pre-emptive
  rights
• Despite being the first listed convertible in
  South Africa and local investors being required
  to utilise offshore investment allowances, it was
  very well received and RMB exercised the R150m
  greenshoe

In the current environment, pre-marketing is
successfully applied - Minimises market risk -
Allows fine tuning of launch terms Opportunistic
financing with the aim to refinance upcoming
redemption or generate liquidity were the key
motivation for issuers We expect the market
activity to continue near-term
Aquarius Jibar3 up 25 Listed 11 May 2009 Size
R650m Structure 3NC1

• Opportunistic funding in the convertible market
  for a company in arguably one of the toughest
  sectors, on the back of three well-received
  transactions
• 12 accounts were wall-crossed over the four days
  prior to launch which enabled Morgan Stanley to
  assess investor appetite and sensitivity to
  coupon being greater than to premium level
  pre-marketing enabled to have the book entirely
  covered at the mid-point of the marketing range
• Books were c.9 times oversubscribed with c. 80/20
  cb specialists vs non-cb specialist funds, due
  to the specific sector

Unibail 3.5 up 30 Priced 21 April 2009 Size
575m Structure 5NC3

• Final phase of refinancing process after sale of
  AngloGold stake and 2bn bond
• The transaction was pre-marketed to 15 accounts
  generating 1.5bn in anchor demand
• It was very well received as it alleviated the
  need for a potential rights issue books were c.6
  times oversubscribed with 70/30 proportion of cb
  specialist vs. non-cb specialist outrights
  specialist fund allocations (75/25 at time of
  demand)

Anglo 4 up 35 Priced 16 April 2009 Size
1,700m Structure 5NC3

• Refinancing of outstanding convertible maturity
  in Jan 2010 part of the bonds were
  simultaneously bought back through a reverse
  bookbuild followed by a tender offer
• The transaction was confidentially pre-marketed
  the previous day to 6 accounts generating 425m
  of interest
• Books were c.8 times oversubscribed with c. 75/25
  proportion of convertible specialist funds vs.
  non-specialist outright funds, at allocations
  (80/20 at time of demand)

Cap Gem. 3.5 up 35 Priced 8 April 2009 Size
575m Structure 5NC3

• Refinancing of upcoming debt maturities and
  generation of liquidity
• Massive investor interest as first convertible to
  come to the market since July 2008 books were
  c.6 times oversubscribed making allocations
  difficult and deal was upsized twice from 700 to
  1,000 to 1,250m c. 70 of allocations went to
  outright investors
• Following rights issue rumours, share price had
  traded down before the announcement share price
  was up 7.6 on pricing day

Arcelor 7.25 up 32 Priced 24 March 2009 Size
1,250m Structure 5NC4
16
Anglo Tongaat equity placement and exchangeable
bond
On 12 August 2009, Anglo announced a secondary
offering of Tongaat ordinary shares in
conjunction with an exchangeable bond issue
Due to the strong demand for the Tongaat
ordinary shares, Anglo American sold all of its
shares in the equity placing and therefore the
exchangeable bond was not issued However, this
transaction highlighted significant local and
international demand for convertible instruments
Highlights
Proposed terms of the exchangeable bond

• Placement of Anglo American plcs (Anglo)
  entire holding of 51.2 million Tongaat Hulett
  Limited (Tongaat) ordinary shares, representing
  approximately 49.5 of Tongaats listed shares
  through a secondary offering
• Launched as a simultaneous equity placement and
  exchangeable bond issue (with R2 billion of the
  bond underwritten by RMB)
• structure of the transaction allowed for the size
  of the exchangeable and equity placing components
  to be adjusted based on market demand and
  achievable pricing for the respective offerings
• a complete solution for Anglo allowing one-stage
  exit from a sizeable position in a listed company
• Due to the strong demand for the Tongaat ordinary
  shares, Anglo sold all of its shares through the
  equity placing and therefore the exchangeable
  bond was not issued
• However, market feedback on August 12, 2009
  indicated a strong demand from both local and
  international investors for exchangeable
  instruments

17
Aquarius Platinum R650 million convertible bond
On March 26 2009, RMB announced the issue of a
R500-650m inward listed convertible bond for
Aquarius Platinum, the worlds 4th largest
platinum producer The transaction was very well
received by the market, with both local and
international investor demand Aquarius Platinum
is the first company to access the South African
convertible bond market This transaction
highlights the existence of significant local
demand for convertible instruments, as well as
for higher-yield issuers
Highlights
Transaction details

• Offering fully underwritten by RMB
• The offering was announced concurrently with an
  equity placement and a rights issue designed to
  recapitalise Aquarius Platinums balance sheet,
  allowing the Company to
• Refinance its R1.6bn bridge loan facility which
  matures in June 2009
• Re-open the Everest mining operation
• Finance the acquisition of Ridge Mining plc and
• Provide the Company with increased financial
  flexibility
• The transaction has been very well received and
  the greenshoe exercised in spite of the fact that
  this is the first instrument of its type listed
  in South Africa and local institutions were
  subject to Excon restrictions

Share price performance
Refinancing and convertible bond launch
Source INet
18
Anglo American 1.7 billion convertible bond
On April 16, 2009, Morgan Stanley launched and
priced a 1.5bn convertible bond for Anglo
American, one of the worlds largest diversified
mining group The transaction was very well
received by the market with books multiple times
covered The offering was priced with a 4.0
coupon, below the tight end of the marketing
range of 4.25-4.75 The CDS tightened by 20bps
and the stock price was up 1.0 on the day of
launch
Highlights
Transaction details

• On April 16, Anglo American launched and priced
  an offering of 1.5bn convertible bonds due May
  2014
• The offering was announced only 2 weeks after
  Anglo American successfully accessed the debt
  market with a dual tranche 2bn bond
• the 2 transactions combined allow Anglo American
  to refinance its 3bn revolving bank facility
  which matures in 2009, and provide the Company
  with increased financial flexibility
• The transaction was very well received with books
  multiple times covered, on the back of the recent
  strong equity market rally and lack of primary
  convertible issuance

Share price performance
GBP m Shares

Convertible bond launch
Source Bloomberg
19
AngloGold Ashanti 825 million convertible bond

• On May 18, 2009, Morgan Stanley, as
  joint-bookrunner, successfully priced a 650m
  convertible debt offering for AngloGold Ashanti
  (AU/NYSE and ANG/JSE)
• AngloGold Ashanti is a leading international gold
  mining company
• Transaction priced at the aggressive end of price
  talk with a 3.50 coupon and a 37.5 conversion
  premium
• Price talk of 3.50 - 4.00 up 32.5 37.5
• Most aggressive coupon/premium combination
  year-to-date

Highlights
Transaction details

• AngloGold issued 650m convertible notes in a
  144A and RegS offering targeting investors in
  both US and Europe
• Bonds priced at the aggressive end of the initial
  price talk
• Transaction upsized to 650m from an initial
  launch size of 575m
• Marketing consisted of 1-on-1 conference calls
  and a group investor call
• 261 investors in the order book
• 4bn in total demand
• Allocations split 73 / 27 in favor of RegS
  tranche

Share price performance
USD

Conversion Price 47.6126
Source Bloomberg
20
Case studies
RMB Morgan Stanley credentials
21
RMB has significant equity capital market
transaction experience
R1,148m accelerated placing, R657m rights offer
and R650m convertible bond March 2009
R4.2bn accelerated bookbuild placement of Tongaat
Hulett shares, structured with R2bn underwritten
exchangeable bond August 2009
R750m rights issue October 2008
Financial advisor sponsor
Financial advisor, structurer, sponsor and
underwriter
Financial advisor,sponsor underwriter
Unbundling and R5bn listing ofEqstra on theJSE
Main Board May 2008
R6.3bn repurchase of Implats shares, R2.9bn
accelerated placing and R2bn funding part fund
the transaction April 2008
19.7bn IPO of Visa Inc on the NYSE March 2008
Financial advisor
Financial advisor, structurer, funder and
bookrunner
Co-Manager
R1.3bn accelerated placing ofExxaro Resources
shares on behalf of Anglo American and Exxaro
Resources April 2007
R2.2bn accelerated placings ofExxaro Resources
shares on behalf of Anglo American September
2007
R500m accelerated placing of Super Group shares
on behalf ofPeu Limited August 2007
R1.3bn accelerated placing of Gold Fieldsshares
on behalf ofHarmony Gold August 2007
R500m rights issue October 2007
R100m fully marketedcapital raising September
2007
Financial advisor and bookrunner
Financial advisor and bookrunner
Joint bookrunner
Advisor and bookrunner
Bookrunner, financial advisor sponsor
Financial advisor sponsor
22
International equity distribution platform - RMB
Morgan Stanley
In June 2006 RMB and Morgan Stanley formed a
joint venture in equity sales, trading and
research, which combines RMBs dominant African
expertise with Morgan Stanleys international
distribution reach RMBMS has been involved in a
number of high profile equity capital market
transactions over the previous 3 years RMBMS can
provide Remgro with access to a global equity
distribution platform and global research and
analysis
50
50
Equity Distribution Joint Venture
Research (13 analysts)
Trading (15 trading derivatives)
Sales (4 sales)
Institutional Clients
MS Trading Flows
RMB/MS Proprietary Trading
23
RMB Morgan Stanley - Local footprint combined
with global distribution expertise
Frankfurt
London
Stockholm
Moscow
Luxembourg
Zurich
Boston
Milan
Paris
San Francisco
New York
Lisbon
Geneva
Abu Dhabi /Dubai
Madrid
Johannesburg
Recent African equity capital market transactions
24
RMB Morgan Stanleys JSE market share
RMBMS market share of JSE value traded
RMB Morgan Stanley is the 2nd ranked broker when
measured on market share of JSE value traded Its
market share has moved up by about 1.5 per annum
and currently stands at about 6.85 Business is
about 50 SA clients, 50 non-SA clients
Source JSE stats division. Central order book
trades
RMBMS market share of JSE value traded
Source JSE stats division. YTD 2009 data to end
June 2009
25
RMB Morgan Stanley provides a leading EMEA sales
platform
Specialist Sales
Selected roadshows conferences
Accessing and educating the right investor
base, both local and international, is crucial in
any capital markets process RMBMS has the leading
EMEA specialist sales force, and is the leading
prime broker to hedge funds Paul Hartdegen has
organised numerous international roadshows for a
number of South African corporates Furthermore,
MS listed Net 1 on NASDAQ, and has intimate
knowledge of the company

• Selected SA Companies
• Netcare
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• Tiger Brands
• Discovery
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• ABSA
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• Standard Bank

• Murray Roberts
• Lonmin
• The JSE
• Exxaro Resources
• Hulamin
• Super Group
• African Bank
• Aquarius Platinum
• Grindrod
• Eqstra

South Africa

• Johannesburg based
• Ian Doyle(20 years experience, previously Head
  of Sales at UBS, Head of Sales Trading at UBS,
  BHP Billiton Treasury)
• Sven Forssman(10 years experience, including
  Research editor and corporate broking at Deutsche
  Bank, Financial Mail and Liberty Life)

Sales team ranking
EMEA

• London based
• Paul Hartdegen(12 years experience, previously
  Senior research sales in SA and London for
  Investec, BJM and JP Morgan)
• Mark Epton
• Gabby Palmer
• Gail Hamilton
• Michel Sindelar
• US based
• Irena Radman
• John Tully
• David Andersson

Source Financial Mail survey 2009
Our sales platform provides extensive access to
EMEA investors