What's happening?
KrisEnergy's 7-year senior secured zero coupon notes (which came with detachable warrants) will begin trading over the Singapore exchange (SGX) on Thursday, 2 Feb 17. The preferential offering of S$140m Notes and detachable warrants will be issued as part of broader restructuring framework which includes a 5 year maturity extension and reduced cash coupons of its two senior unsecured note issues (KRISSP 4.000% 09Jun2022 Corp (SGD); KRISSP 4.000% 12Jan2023 Corp (SGD)). We highlight some things that investors should note and share our thoughts on the fair pricing for the new zero coupon notes.
About the new zero coupon notes
As part of a recently-concluded exercise, the zero coupon notes will be issued at a par value of S$1, and will traded in board lot sizes of 1,000 over the exchange, similar to existing retail bond issues. These new notes are issued on the basis of 93 notes with 837 warrants for every 1,000 existing shares in the capital of KrisEnergy, with each warrant carrying the right to subscribe for one new share in the capital of the company of US$0.00125 par value, and may be freely exercised (they may be exercised immediately upon issuance till expiry of the notes in 2024) at S$0.110, allowing current KrisEnergy shareholders who have subscribed to the notes to participate in the upside potential of KrisEnergy's share price.
These secured notes will have a second ranking security over all of the company's assets secured or to be secured under its existing US$148.3m revolving credit facility (RCF) with DBS Bank, which includes all its production and exploration assets in Thailand, Bangladesh and Aceh, Indonesia; as well as a first ranking charge over the shares of SJ Production Barge, a wholly-owned subsidiary of the company. Despite the secured nature of the new notes, investors should be aware that according to exchange filings, the amount of tangible assets charged to secure the repayment of the notes stood at just US$6.6m as of end-Nov 16 (with the bulk of its intangible assets consisting of government-granted concessions, along with recognised goodwill), with US$188.3m outstanding amount ranking in priority to the principal amount of the zero-coupon notes, comprising of US$148.3m utilised under the RCF and US$40m utilised under the bridge upsize granted by DBS Bank. The zero-coupon notes will also be redeemed after the maturity of its two outstanding bond issues.
Additionally, similar to its recently-restructured bonds, the new notes will also sport "incurrence"-based covenants, which will only be tested if the company decides to take on more debt, as opposed to maintenance covenants which has to be maintained periodically. This weakens the protection for noteholders. Specifically, the limitation on indebtedness provision allows the company to incur additional debt if at the point of issuance, it has not defaulted on its existing borrowings and its ratio of consolidated total debt to EBITDA is less than 2.5X; this contrasts with the strict maintenance of these requirements that is more common in high-yield covenant packages. We note also that they do not preclude additional debt to be incurred in connection with financing an acquisition and/or development of assets by the company and of its subsidiaries.
Thoughts on fair pricing
It is worthwhile to emphasize that while these new zero-coupon notes are issued together with warrants, these warrants can be sold separately in the secondary market, and hence each instrument would be priced independently of the other. Given that the new notes will be issued at par and do not entail a cash coupon, investors will need to see the notes at a significant discount to par, with the implied yield-to-maturity commensurate with the credit risk of the issuer (the yield of the zero-coupon notes will be derived solely from the price appreciation of the bonds when bought at a discount and subsequently redeemed at par upon maturity).
To get a sense of what would be an appropriate price to pay for these notes, we may refer to where KrisEnergy's outstanding bonds are currently trading at. Its (recently-restructured) KRISSP 4.000% 09Jun2022 Corp (SGD)s and KRISSP 4.000% 12Jan2023 Corp (SGD)s are currently trading at an indicative YTM of 11.46% and 11.4% respectively (assuming no benefit from additional oil price-linked cash coupons), with an average spread of 933bps over SGD Swaps. However, several considerations would have to be taken into account in looking at what would be a "fair" price of the zero-coupon notes: 1) these new notes are secured against the company's production assets, which should entail a tighter spread compared to its unsecured 4% bonds; and 2) the notes do not contain a cash coupon, with returns accruing only upon maturity on the 7th year when the notes are redeemed (wider spreads). Taken together, we think that these new notes would have to be priced at least in line with its outstanding senior unsecured debt, implying an annualized yield of 11.74% for a 7-year issue, and entailing a 54% discount to par, with a "fair" price of S$0.46. Despite that, we may see little activity once the notes begin trading over the exchange given that existing shareholders who have subscribed to the new notes and detachable warrants (principally Keppel Corp) may see better value in holding these notes to maturity rather than offering them at a discount.