KEY POINTS:
How did Fonterra mop-up a potential $1 billion from its unsecured bond issue on the strength of its reputation alone?
That's one of the questions which has rippled through some segments of the investing community in the wake of Fonterra's announcement of a firm allocation of $800 million of senior unsecured bonds paying a minimum coupon of 7.75 per cent - an offer which the company says was an over-subscription by 267 per cent of its original benchmark ($300 million).
NZX market participants and institutional investors swamped the offer. There will be no retail issue but the bonds will ultimately be listed, providing an entry point for smaller investors.
A paper circulated by Reid Asset Management questions the lack of any financial information in the bonds investment statement noting the company is due to report next month the financial information which shows how it's traded over the last six months.
"This is information that should be considered very important to making an informed decision regarding the current bond issue. Economic and financial market conditions have changed materially since the last set of financial statements were released last year and investors should have updated financial information as to how Fonterra is currently faring," says Reid, which goes on to note the 30 per cent fall in the company's share price since the middle of last year does "perhaps provide some guidance as to how the company has been performing."
In fact, the total response from subscriptions was well in excess of $900 million, according to Blue Read, who chairs Fonterra's Shareholders Council. Read says Fonterra had the ability to accept all the over-subscriptions but had scaled it back by around 20 per cent to get to the firm allocation figure of $800 million.
At issue still is how the funds will be deployed: Whether the $800 million will be used for working capital - as was announced in relation to the $300 million starting point - or whether it will be applied to restructure debt or for acquisitions.
Fonterra is right to acclaim the oversubscription as a vote of confidence in the company. But Reid also has a point. "Investors must ask themselves whether they are prepared to lock up funds for six years at 7.75 per cent when they don't fully understand the implications that current global conditions are having on Fonterra.
The company should have communicated how it is currently positioned so that investors could determine whether the return offered
was commensurate with the level of risk being undertaken."
