It is Not Quite Default Time For FNN

Reuters reported that FNN is heading for a showdown with bondholders who were unhappy with the terms of FNN’s offer for their papers.

“F&N will be a very different company now with FCL carved out. We appreciate their support in the past. The consent exercise provides them a prepayment fee and a consent fee. If consent is not obtained, then an event of default will occur and under the terms and conditions of the notes/bonds, repayment will be at par,” said a spokesperson for F&N.

http://mobile.reuters.com/article/idUSL1N0IM0B020131101?irpc=932

The offer in summary is to buy the bonds back at par and pay half of the coupon out of goodwill and a small consent fee (for early birds), along with the accrued interest due. This is a standard clause for high yield issues in the market but always at the inception of the bond issue and not inserted randomly during a call exercise which has stirred up the angst of bondholders holding on to the high coupon tranches that were trading well above the call price.

More details of the announcement :

The Company wishes to announce that it has today commenced a consent solicitation process to seek the approval of the holders (the “Noteholders”) of the Notes (the “Notes Consent Solicitation”) and the holders (the “Bondholders”) of each tranche of Bonds (the “Bonds Consent Solicitation”), by way of extraordinary resolutions to, inter alia:
(a) waive the non-compliance with certain provisions of the Notes or (as the case may be) the Bonds and the trust deed constituting the Bonds, in each case, which will or may occur as a result of the FCL Distribution;
(b) waive the occurrence of certain event(s) of default or (as the case may be) potential event(s) of default under the terms and conditions of the Notes or (as the case may be) the Bonds, in each case, which will or may occur as a result of the FCL Distribution; and
(c) make an amendment to the terms and conditions of the Notes or (as the case may be) the Bonds to include a call option, where the Company may, at its option by giving not less than five days’ notice, redeem all (but not some only) of the Notes or (as the case may be) the Bonds on any date falling on or prior to 30 June 2014 at:
(i) FNN 5.5% 18 Mar 2016 last price 106.70
Issue Size SGD 108.25 mio
(in the case of the Series 009 Notes) 100 per cent. of the nominal amount of the Series 009 Notes, together with a prepayment fee of 2.75 per cent. of the nominal amount of such Series 009 Notes and interest accrued to (but excluding) the date fixed for redemption;
(ii) FNN 6% 30 Apr 2019 last price 109.70
Issue Size SGD 200 mio
(in the case of the Series 010 Notes) 100 per cent. of the nominal amount of the Series 010 Notes, together with a prepayment fee of 3.00 per cent. of the nominal amount of such Series 010 Notes and interest accrued to (but excluding) the date fixed for redemption;
(iii) FNN 2.45% 27 May 2015 last price 100.85
Issue Size SGD 50 mio
(in the case of the Series 011 Notes) 100 per cent. of the nominal amount of the Series 011 Notes, together with a prepayment fee of 1.225 per cent. of the nominal amount of such Series 011 Notes and interest accrued to (but excluding) the date fixed for redemption;
(iv) FNN 2.48% 27 May 2015 last price 100.60
Issue Size SGD 220 mio
(in the case of the 5-Year Bonds) 100 per cent. of the principal amount of the 5-Year Bonds, together with a prepayment fee of 1.24 per cent. of the principal amount of such 5-Year Bonds and interest accrued to (but excluding) the date fixed for redemption; and
(v) FNN 3.15% 28 Mar 2018 last price 102.20
Issue Size SGD 80 mio
(in the case of the 7-Year Bonds) 100 per cent. of the principal amount of the 7-Year Bonds, together with a prepayment fee of 1.575 per cent. of the principal amount of such 7-Year Bonds and interest accrued to (but excluding) the date fixed for redemption.

Interesting to note that the offer has missed out 2 of their issues – the Fraser and Neave 3.62% 13 Oct 2015 and the FNN floating rate note due 28 Jun 2018. The Fraser and Neave paper is probably issued under a different MTN programme which would probably have a different consent solicitation process while the floating rate note is probably cheap enough at 3M SOR (today’s price at 0.20442%) + 0.65%, for them to keep outstanding.

Just checking out the last done prices above, you can tell who is going to vote “yes”. But they do need 75% acceptance rate for the offer to succeed.

Perspective for bondholders :

1. This is a covenant breach due to the loss of a core asset and not poor performance.
2. The company does not have a CALL OPTION and bondholders have the upper hand with their PUT OPTIONS – Thus bondholders can choose to ignore the default and hold on to the bond, it would seem.
3. Singapore law has not been tested as to if bondholders can choose to exercise management control and stop equity distributions or stop the spin off of the core asset legally. Because otherwise, it would be a signal that companies in Singapore can deliberately breach covenants when they desire to.

This is not a first for Singapore. I was slaughtered back in 2004 when Huaneng bought over Tuas and exercised the call option (AT 100) on change of ownership. The Tuas 2009 bonds were going for 104 then and I had quite like SGD 10 mio in my trading books then. I think Power Senoko or Seraya were much nicer about their delisting but I can’t fully recollect at the moment. And OCBC too when they called back their perp or sub at market price.

Humans only hold on to the bad memories. Good luck !!