NOL bond holders hit by change in control

French company CMA CGM, the world's third-largest container shipping group, last month said it was buying Singapore government- owned NOL.
French company CMA CGM, the world's third-largest container shipping group, last month said it was buying Singapore government- owned NOL.PHOTO: AGENCE FRANCE-PRESSE

Potential change in majority stakeholder from Temasek to France's CMA CGM affects the value of bonds

Since Singapore investment company Temasek Holdings last month said it would sell its majority stake in Neptune Orient Lines (NOL) to CMA CGM, notes issued by the container liner have lost as much as 13 per cent.

Yields on the unrated bonds have surged to more than twice the levels they first sold at starting in late 2010. The losses are a fresh blow to an illiquid market already shaken by its first default since 2009 in November. Some of NOL's notes have clauses that will be triggered by the planned sale, allowing for potential early repayment or compensation.

Such change-of-control features are often inserted in debt that benefits from implicit parental support from the likes of Temasek, which has an AAA rating and owns majority stakes in companies with $6.3 billion of outstanding local bonds.

"The confidence placed in government-owned companies was somewhat over-extended," said Ms Elaine Ngim, head of fixed income for Asia at private banking unit Coutts, Royal Bank of Scotland's private banking unit. "Investors who are looking to invest in these companies should look closer at the covenants of each issue, ensuring they are well protected on the downside should government support be removed."

NOL's 2020 and 2021 notes have dropped by 10 to 13 per cent since Temasek said it would exit. They do not offer investors any compensation under a change of ownership. The 2017 and 2019 bonds, which do have clauses allowing new owners to decide on early redemption or paying a higher coupon, lost 1.7 per cent and 9.5 per cent.

The covenants in NOL's bonds reflect market terms around the time the securities were sold, said Mr Jack Liang, the firm's head of investor relations.

CMA CGM, the world's third-largest container shipping group, said it will look at redemption options "later" as the takeover offer is still pending regulatory reviews.

Temasek declined to comment on debt issued by its majority- owned entities.

CMA CGM on Dec 7 offered $3.4 billion for the Singapore company that has lost money in five of the past six years.

Temasek, which has controlled NOL since 2004, is selling as a glut of capacity and declining demand push Baltic Dry freight rates to the lowest level since at least 1985.

Mr Lutz Roehmeyer, director of fund management at Landesbank Berlin Investment which holds the NOL bonds that have covenants, said he would reduce his holding if the sale goes through.

NOL's bonds appear to be catching up with market reality as their yields surge into junk territory, closer to the debt issued by its suitor. The yield on its 2017 notes has jumped to 7.35 per cent from 5.41 per cent before the takeover offer, according to Bloomberg-compiled prices. Its 2021 notes' yield surged to 11.1 per cent from 7.1 per cent.

CMA CGM's euro-denominated 2021 notes, rated six levels below investment grade by Moody's and Standard & Poor's, traded at 84.4 per cent of face value to yield 12 per cent on Thursday.


A version of this article appeared in the print edition of The Straits Times on January 09, 2016, with the headline 'NOL bond holders hit by change in control'. Print Edition | Subscribe