Convertible bonds provide the platinum solution for issuers and investors

Dave Sinclair


Over the past three months, the Capital Markets teams at Rand Merchant Bank (RMB) have successfully raised R7.7bn for two separate clients by structuring and facilitating the issuance of convertible bonds in the local and international markets.  

In March 2017, RMB assisted Royal Bafokeng Platinum Limited (RBPlat) to issue R1.2bn of unsecured, convertible bonds due in 2022 as part of a complete funding solution to secure the transition into the next phase of ramping up its Styldrift I mine from 50,000 tonnes per month to 150,000 tonnes per month by the end of 2018. This level of production secures the optimal level of Merensky reef production for RBPlat in a platinum group metals environment faced with uncertainty. The RBPlat Merensky production will also position RBPlat further down the cost curve securing the sustainability of the operation going forward.

RBPlat’s convertible bonds were issued at par and pay a fixed coupon at a rate of 7% per annum payable semi-annually in arrears. The bonds are convertible into ordinary shares of RBPlat at an initial conversion price of R42.9438, representing a premium of 30% to the reference price of R33.0337 being the volume-weighted average price of the ordinary shares listed on the Main Board of the JSE from market open to the close of the offer on the day of launch. The bonds are convertible into approximately 27.9 million ordinary shares, representing approximately 14.3% of the current outstanding share capital of RBPlat. The convertible bonds are listed on the Main Board of the JSE and will mature on 16 March 2022.

RMB and Morgan Stanley & Co. International plc (Morgan Stanley) acted as joint global co-ordinators and bookrunners for the RBPlat offering.

Impala Platinum Holdings Limited (Implats) came to market in May 2017, with a dual tranche offering of R3,25bn and US$250m unsecured convertible bonds due in June 2022. This R6.5bn transaction was launched together with a concurrent repurchase of Implats’ existing R2,672bn and $200m unsecured convertible bonds due in 2018. Implats used the net proceeds from the 2022 convertible bond offerings to refinance the existing convertible bonds maturing in February 2018 thereby significantly enhancing Implats’ short-to-medium term liquidity in line with its strategy to maintain a strong financial position.

Implats‘ ZAR convertible bonds bear interest at 6.375% and the USD convertible bonds bear interest at 3.25% per annum, each payable semi-annually in arrears. Both tranches of the 2022 convertible bonds will, subject to the approval of Implats’ shareholders, be convertible into ordinary shares of Implats. The respective initial conversion prices of R50.0092 and $3.8907 were set at a premium of 32.5% above a reference share price of R37.7428, being the volume-weighted average price of an ordinary share on the Main Board of the JSE between launch and pricing. Implats intends to apply for admission of the 2022 ZAR convertible bonds for trading on the Main Board of the JSE and the 2022 USD convertible bonds for trading on a European stock exchange, in each case within 90 days following settlement of the 2022 convertible bonds.

RMB, Morgan Stanley and Deutsche Bank AG, London Branch, acted as as joint bookrunners with Deutsche Bank AG, London Branch acting as sole global co-ordinator.

These two transactions showcase the versatility of convertible bonds as a capital raising instrument that is beneficial for both the issuer and the investor. The hybrid nature of the instrument means that issuers and investors can benefit from the protections offered by debt instruments and monetise the benefits of the potential equity upside.

The primary benefits for the issuer is that it can raise sizable amounts of capital at a relatively low cash cost of interest. A convertible bonds’ coupon allows the company to raise long-term, fixed-rate funding that is tax deductible for the issuer. As the instrument is classified as debt until conversion, bondholders are not permitted to vote allowing the deferral of voting dilution. To the extent that the instrument has not already been converted, the issuer can roll the convertible bond by repurchasing the existing instrument and issuing a new convertible bond struck at current market rates. This is referred to as “rolling the convert”, and allows the issuer to delay dilution by making the convertible bond a permanent part of the capital structure for as long as the convertible bond is rolled.

The primary benefits for the investor is that the convertible bond provides downside risk protection as the value of the instrument is limited to the par value (in the normal course of business) whereas an outright equity position in the issuer’s stock can fall significantly below the initial purchase price if the share price declines. The investor is also able to participate in the equity upside as the share price appreciates past the conversion price. An additional benefit for the investor is the coupon payment received, particularly in stocks that are not currently paying a dividend. An investor benefits from security of capital, regular income and the potential for equity upside participation.

Both RBPlat’s and Implats’ convertible bond offerings enabled RMB’s clients to optimise their cost of funding and raise sizable amounts of funding in the capital markets by tapping a more diversified, deeper pool of liquidity.

Dave Sinclair is Debt Capital Markets transactor at Rand Merchant Bank.