CapitaLand’s Smart Financing Move

Capitaland_logo CapitaLand (SGX: C31), one of Asia’s largest real estate-related companies – it’s also the majority owner of fellow Straits Times Index (SGX: ^STI) component, shopping mall owner CapitaMalls Asia (SGX: JS8)announced in the wee-hours of today that it intends to issue S$750m worth of convertible bonds with a maturity date of 17 Oct 2023 and an annual interest payment of 1.95 per cent.

Majority of the proceeds from the sale of the bonds (95%-to-100% to be precise) will go toward repaying some of the company’s previous debts.

It’s a smart move by CapitaLand given the profile of the debt – shown below – that it intends to pay down:

  • S$430m worth of convertible bonds that are due on 2016, carrying annual interest payment of 2.1 per cent.
  • S$120m worth of convertible bonds that are due on 2016, carrying annual interest payment of 2.875 per cent.
  • S$130m worth of convertible bonds that are due on 2018, carrying annual interest payment of 3.125 per cent.

It’s pretty clear, judging from the difference in the interest payment for the just-announced bond offering compared to the ones that will be paid-down, that CapitaLand will be saving at least a small chunk of change that can go into boosting its bottom-line in the future.

The company’s full-year results for the whole of 2012 saw finance costs of S$499m, of which the bulk comes from interest payments from its borrowings. Those expenses made up almost 15% of the company’s revenue for the year, so any savings in interest payments can help benefit future profits for shareholders.

Of course, it should be noted that as of 30 June 2013, CapitaLand has total debt of S$14.2b, so the refinancing of the debts that are shown above (worth a total of S$680m) is not really significant in the grand scheme of things. That said, the refinancing-action is a step in the right direction for shareholders given the lower interest payments that pertain to the new convertible bonds.

The 1.95 per cent convertible bond issued by CapitaLand can be converted into its common shares at a conversion price of S$4.212 per share, representing a 30% premium over Thursday’s close at S$3.24.

178m new shares would have to be issued by the company assuming full conversion of the bonds. There’s a huge window stretching from 27 Nov 2013 till 7 Oct 2023 (excluding certain specified dates) where bond holders have the option to convert their bonds into common shares.

Using CapitaLand’s latest share count of 4.257b, existing shareholders are looking at a tiny dilution of around 4% assuming full conversion.

Foolish Bottom Line

Companies often undertake financing actions that can either be beneficial or detrimental to shareholders’ benefits depending on the scope and type of action taken. It thus pays for investors to keep a close on such actions taken by companies they own shares of.

In the case of CapitaLand, it’s clear that shareholders can get to benefit from reduced interest expenses in the future, assuming of course, that all else stays constant.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.