Here’s something that’s likely to anger shareholders in Rio Tinto.
It’s the pricing of a $1.5bn convertible bond launched by rival mining company Anglo American on Thursday.
The Bonds will be convertible into new ordinary shares of Anglo American plc (“Shares”) and will have a coupon of 4% per annum, payable in two semi-annual instalments, and a conversion price of £18.6370. The Bonds will be issued at 100% of their principal amount and, unless previously redeemed, converted or cancelled, will mature on the fifth anniversary of the issue of the Bonds in 2014. The Company will have the option to call the Bonds after the first three years should the price of the Shares exceed 130% of the then prevailing conversion price over a specified period.
Cynthia Carroll, Chief Executive of Anglo American, said: “We are very pleased with the positive market response to this convertible issue, reflected in the very strong demand for the issue and the 35% premium to the volume-weighted average share price at pricing. Following decisive management actions to reduce capex and operating costs, the suspension of the dividend, the disposal of the Company’s residual stake in AngloGold Ashanti and the recent US$2bn bond offering, this issue represents a further significant step in strengthening Anglo American’s balance sheet.
So a 4 per cent coupon and 35 per cent conversion premium. Now compare this with the terms of the convertible bonds Rio is offering Chinalco as part of its proposed $19.5bn investment in the company.
US$ 7.2bn investment in Rio Tinto through subordinated convertible bonds
•Two tranches in each of Rio Tinto plc and Rio Tinto Ltd:
•Tranche A convertible at US$ 45 per share, issue size of US$ 3.1bn
•Tranche B convertible at US$ 60 per share, issue size of US$ 4.1bn
•9.0%coupon for Rio Tinto plc, 9.5% coupon for Rio Tinto Ltd bonds; 9.2% weighted average coupon1
•If fully converted, Chinalco’s interest in Rio Tinto would be 18.0%,including existing interest of 9.3%–14.9% in Rio Tinto Ltd–19.0% in Rio Tinto plc.
Of course, Rio is a weaker company than Anglo American in terms of debt, and the Anglo CB offering is much smaller. But the terms offered to the Chinese by Rio still look really attractive, all the more so following the recent rally in the Rio share price as the mining team at Liberum Capital noted this morning.
Rio Tinto is now trading at £24/shr, the premium to both tranches is significantly reduced. We estimate the first tranche of Rio converts is being issued at only a c.5% premium, down significantly from the 68% premium based on Rio’s share price when news of a potential Chinalco deal first surfaced. Similarly, on the tranche of bonds with the highest conversion price, the premium has fallen to below 85% from the 176% over the same time period.
All of which means Rio shareholders have been given another reason to vote down the deal with Chinalco, unless the terms are changed or shareholders are offered some of the bonds.
Fortunately, Rio seems prepared to listen as its outgoing chairman Paul Skinner made clear at Wednesday’s AGM.
From the FT.
A point of contention for many UK shareholders remains their exclusion from the bond, which not only converts to equity but pays a 9 per cent coupon. Asked if there was room for compromise with shareholders on the bond offer, Mr Skinner said it was too early to speculate. But he added: “We hope to be in a position to offer something that pleases everyone.”
And so do Chinalco.
Any changes to the deal terms would require assent from Chin-alco. A person close to its thinking has indicated that the Chinese miner is more flexible on bond terms being altered than asset stakes being changed.
Update:
Some further analysis. Some other points to take into consideration when comparing the two bonds.
- Anglo’s CB is senior, Rio’s is deeply subordinated.
- The Anglo CB has full dividend protection, i.e. for every dividend paid, the conversion price is lowered by the full amount.
- The Anglo CB is 5 years, Rio’s is 60 which is closer to equity and so gets rating agency credit which the Anglo bond doesn’t.
- Also, the two companies have jsut completed similar senior bond issues at similar coupons (Rio’s was slightly better at 8.95% for a 5yr and Anglo got 9.35% for a 5 year).
Related link:
A pioneering strategic partnership? – FT Alphaville