Is OSIM sell-off linked to S$170m bond issue?
Singapore
AS OSIM International shares get pummelled further away from its near-term peak of S$2.87 scaled merely 2 1/2 months ago, the rub, say some market wags, could be related to the firm's S$170 million convertible bonds which were placed out to investors by HSBC, the issue's sole book runner and lead manager.
On Monday, the shares of the mainboard-listed massage chair maker got kneaded downwards again for the second straight trading day. The counter slipped eight Singapore cents or 3.3 per cent to S$2.35 - some 19 per cent off the one-year high reached on April 30 of S$2.90.
The convertible bonds placed out to investors in late August were lauded by analysts for its relatively cheap cost of funding - the five-year unsecured bonds bear no interest rate - but what appears to have piqued curiosity only now is that one day after the fund-raising plan, Ron Sim, OSIM's founder, chief executive and majority shareholder, entered into a stock borrow agreement with HSBC involving 20 million of his shares.
In filings to the Singapore Exchange, the firm said that the stock loan was issued to HSBC by Mr Sim "in support of (the) proposed issuance of convertible corporate bonds by OSIM International Ltd on 26th August 2014".
Typically, hedge fund investors would obtain the borrowed scrip from the arranger or the banks and short the shares for gains while they hedge their bet by going long the bonds, a trading strategy known as "delta hedging" or convertible bond arbitrage which is popular with hedge fund managers given its potentially high returns and low degree of equity risk.
The concern among some quarters of the market in recent weeks is that hedge fund managers may have borrowed the scrip from HSBC which were provided by Mr Sim to short the stock which is leading to OSIM's bearish grip over the past two to three weeks.
That's a "misconception", says HSBC head of equity capital markets for South-east Asia, Matthew Song, when contacted by The Business Times. Saying that such stock borrow agreements are in fact "very common" and accompanied some 80 per cent of convertible bonds issued in Asia, Mr Song clarified that the number of shares under the agreement was in fact "largely unutilised" and was returned to Mr Sim.
To be more precise, only some 10 million shares or half of the shares allocated under the agreement were used for the final securities borrowing and lending (or SBL), Peter Lee, OSIM's chief financial officer, told BT.
In terms of investor mix, Mr Song said about two thirds of the convertible bonds were taken up by "outright investors" while the remaining were placed out to hedge funds.
"As the number of hedge funds who took up the bonds are relatively small, this means the number of stock on borrow for the convertible bond (CB) was minimal in relative value to the size of the CB issuance and the market capitalisation and trading liquidity of OSIM," he said.
As such, Mr Song said, it would not have led to OSIM's depressed share price. "In fact, on a net basis, there is generally a neutral impact on the share price as the short position offsets the long," he explained.
What then ails OSIM's stock, which is generally liked by the investing fraternity for its store productivity, healthy net cash status and high dividend payouts? There may be several factors, many of which have also afflicted the Singapore bourse.
For one, the broader market has fallen over this period which usually leads to well-owned stocks falling more, says OSK DMG Research analyst James Koh. "Investors may also be worried about Occupy HK impact on OSIM, given about 15 per cent of sales still come from that market," he added.
The firm is also due to release its third-quarter results on Oct 28 which some reckon may be disappointing - another possible dampener.
