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Temasek Falls Short
Temasek, the Singapore investment fund, appears at first glance to have hit on an ingenious way of raising money cheaply. It has sold 650 million Singapore dollars ($512 million) of bonds, exchangeable into shares of Standard Chartered, the emerging market lender. If the bank’s shares rise more than 27 percent within three years, holders of the bond can convert at a profit. If not, bondholders get back exactly what they put in, with no interest.
Consider the deal as two different bits of paper, exchangeable into a single Standard Chartered share. One part would be a zero-yield bond, with a face value of 36 Singapore dollars. Assume lenders to Temasek, rated triple-A, normally demand a 1.8 percent annual return and that bond is worth around 34.50 Singapore dollars today.
The other part is a call option on Standard Chartered shares. Plug the bank’s current price, its forecast 3.5 percent dividend yield, and the implied volatility of its stock into an options calculator, and the option is worth about 4.50 Singapore dollars. Combined, the two pieces have a total value of 39 Singapore dollars, or about 8 percent more than investors paid.
But the deal probably isn’t so sweet. The value of the call option is inflated because Standard Chartered 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 1 Singapore dollar, leaving the value of the whole package a little below the sticker price.
For Temasek, there are obvious attractions. Even if all the bonds are exchanged for shares, it will retain a 17 percent stake in Standard Chartered. And if the shares don’t increase much, the Singaporeans will have borrowed 650 million Singapore dollars interest-free.
For all that, though, 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 40 million Singapore dollars. Moreover, the bond issue led to a mini-rout on Standard Chartered 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.
For more independent financial commentary and analysis, visit www.breakingviews.com.
- http://www.nytimes.com/2011/10/20/business/olympus-faces-credibility-gap.html?_r=1
Temasek, the Singapore investment fund, appears at first glance to have hit on an ingenious way of raising money cheaply. It has sold 650 million Singapore dollars ($512 million) of bonds, exchangeable into shares of Standard Chartered, the emerging market lender. If the bank’s shares rise more than 27 percent within three years, holders of the bond can convert at a profit. If not, bondholders get back exactly what they put in, with no interest.
Consider the deal as two different bits of paper, exchangeable into a single Standard Chartered share. One part would be a zero-yield bond, with a face value of 36 Singapore dollars. Assume lenders to Temasek, rated triple-A, normally demand a 1.8 percent annual return and that bond is worth around 34.50 Singapore dollars today.
The other part is a call option on Standard Chartered shares. Plug the bank’s current price, its forecast 3.5 percent dividend yield, and the implied volatility of its stock into an options calculator, and the option is worth about 4.50 Singapore dollars. Combined, the two pieces have a total value of 39 Singapore dollars, or about 8 percent more than investors paid.
But the deal probably isn’t so sweet. The value of the call option is inflated because Standard Chartered 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 1 Singapore dollar, leaving the value of the whole package a little below the sticker price.
For Temasek, there are obvious attractions. Even if all the bonds are exchanged for shares, it will retain a 17 percent stake in Standard Chartered. And if the shares don’t increase much, the Singaporeans will have borrowed 650 million Singapore dollars interest-free.
For all that, though, 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 40 million Singapore dollars. Moreover, the bond issue led to a mini-rout on Standard Chartered 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.
For more independent financial commentary and analysis, visit www.breakingviews.com.
- http://www.nytimes.com/2011/10/20/business/olympus-faces-credibility-gap.html?_r=1
