Indorama Ventures - W1 & W2
What has changed since Capital Day in January 2014 to make IVL require new equity? Are the new projects consistent with IVL’s three-pronged strategy?
IVL has demonstrated the capabilities and leadership to create a business of world scale with US$9 billion proforma sales in 2013. We have reached at a stage with successful acquisitions and Greenfield, where we proudly stand as the world’s number one PET producer, based in Thailand. Over time, IVL has created a unique portfolio mix under its three-pronged strategy of Diversification, Geography and Feedstock Integration. We will continue our growth journey and have a value-creative pipeline of projects up to 2018. Following rare and accretive acquisitions opportunities like PHP Fibers, TurkPET and SASA, IVL is working with a JV partner in Abu Dhabi on a world-scale aromatics complex expected to commence production in 2018 that will add further feedstock integration in a strategic region. These movements were revealed in our Business Plan 2018 during Capital Day in January 2014. OurBusiness Plan 2018 is made using conservative margins, lower by 8% over IVL’s last 5-year margin in 09-13. Since the Capital Day we have seen further positive business sentiments. We had said that projects under our Business Plan 2018 could be internally funded. However, IVL has now identified further growth opportunities on the horizon especially focused on low-cost shale feedstock and high-margin HVA businesses to complement our current competencies. We now have progressed on discussions on shale-based ethylene and MEG in North America and have some more compelling M&A opportunities that rarely occur and that IVL would like to take advantage of.
These new opportunities will require funds in the future and IVL is preparing plans in advance for that by issuing free warrants to existing shareholders, partly to be transparent of our future equity needs and partly to reward them for being patient with us on our journey.
What is a Warrant?
A derivative security that gives the holder the right to purchase securities from IVL at a specific price within a certain time frame. The main difference between warrants and call options is that warrants are issued and guaranteed by the company, whereas options are exchange instruments and are not issued by the company. Also, the lifetime of a warrant is often measured in years, while the lifetime of a typical option is measured in months.
What is the objective of the Warrant Issuance?
- to raise equity in the future to finance potential projects that will occur in addition to “Plan 2018” projects, termed “New Opportunities in addition to Plan 2018”
- to maintain a suitable capital structure, in-line with peers
- To reward long-term shareholders with free warrants (which can be viewed as a special dividend)
Why issue warrants instead of raising equity immediately?
Projects under the current plan to 2018 are fully funded, however, new opportunities are becoming available over the next few years and IVL forecasts it will need more equity from 2016 onwards. Warrants are more suited to those future needs.
Why is IVL issuing a Warrant RO, not a regular stock RO?
IVL does not need the funds today. The warrants allow IVL to raise funds over a period of time to match expected cash shortfall needs. Moreover, we would like to provide a return to existing shareholders through a free, tradable warrant, at zero cost to the shareholder. This provides existing investors with the flexibility of deciding when and whether to exercise the warrants in the future.
Why is IVL conducting a Rights Offering, not a Public Offering or Private Placement?
We would like all existing shareholders to have the opportunity to participate in IVL’s future and reward existing long-term shareholders. A Rights Offering is the cheapest, fairest method (to existing shareholders) of raising equity. Moreover, if existing shareholders participate in the rights offering, they will not experience any control dilution.
A Public Offering is more time-consuming because it requires SEC approval and costly because of the associated underwriting fee. It also creates control dilution and if sold at a discount, price dilution, to existing shareholders.
A Private Placement creates control dilution and if sold at a discount, price dilution, to existing shareholders.
Structure of Warrant Issues
Why is IVL launching two separate issues? Why not combine the issues?
We want to manage the timing of proceeds from the warrants to reduce any future price dilution (to IVL shareholders) that may occur as a result of the warrants being in-the-money during the exercise periods. The benefits from separating the issues are that this increases the likelihood that the warrant proceeds received are spread out over the exercise periods of IVL-W1 and IVL-W2, which will better match the capital needs for the new projects. This method also allows for two exercise prices with staggered exercise periods, which provide us with the chance to issue new shares at the appropriate market price at that time while mitigating the potential price dilution.
Some of the negative aspects of combining the two issues into one are the increase in the risk that total proceeds from the warrants may not be realized until the end of the warrant term. It would create only one exercise price. If the exercise price is set at the IVL-W1 level, the risk is of forcing greater price dilution. If the exercise price is set at the IVL-W2 level, the risk is that the warrants would be out-of-the-money (i.e. too low to encourage exercise).
Why are the Warrants launched at the same time? Why not IVL-W1 first and then IVL-W2 later?
Even though IVL-W1 and IVL-W2 are issued as separate warrants, their funding objective is the same: to finance “New Opportunities in addition to Plan 2018.” Since IVL already has a good estimate of how much equity it needs for these future projects, there is no need for IVL to wait to issue IVL-W2.
Why doesn’t IVL wait until it is virtually certain that new projects will materialize before issuing Warrants or issuing the RO shares?
The warrants communicate to investors a prudent, forward-looking fund-raising plan for potential “New Opportunities in addition to Plan 2018” equity requirements by structuring the terms of the warrants around the timing and amount of potential future equity needs.
Why is the 1st exercise date (for IVL-W1) so close to the issue date? Will the warrant be in-the-money by then?
By setting the first exercise date early and leaving the exercise period open for approximately three years, IVL provides shareholders with the maximum flexibility in exercising IVL-W1. The warrants may or may not be in-the-money by the first exercise date, but IVL wants to provide warrant-holders with the most flexibility to exercise, regardless.
What criteria did IVL apply to set the exercise prices and exercise periods?
The exercise prices were determined by forecasting the company’s future performance and expected valuation multiples. Based on the existing business of IVL, “Plan 2018” projects and “New Opportunities in addition to Plan 2018” projects, IVL believes that the exercise price of IVL-W1 at THB 36 and IVL-W2 at THB 43 are appropriate and provide a substantial reward to existing shareholders. The exercise period reflects the expected timing of required capital for new projects.
Why is the allocation ratio set at 10 ordinary shares to 1 warrant (10:1) for IVL-W1 and at 13 ordinary shares to 1 warrant (13:1) for IVL-W2?
The allocation ratios were driven by the amount and timing of proceeds required in the future. Once the timing and amount of expected future equity needs were estimated, the allocation ratios were set accordingly.
In calculating the entitlement to receive IVL Warrants, any fractions resulting from the calculation based on the allocation ratio set forth will be rounded down. For instance, in case of a shareholder holding 27 shares, such 27 shares if divided by 10 will be equal to 2.70 (27 divided by 10) for IVL-W1. The fractions of 0.70 will be rounded down and 2 units of IVL Warrants will be allocated to such shareholder. This calculation method will also apply with IVL-W2.
What is the tentative schedule of the transaction?
The tentative schedule can be summarized in the table below:
XR for entitlement to receive IVL-W1 and IVL-W2
|Record Date||13-15 August, 2014
15 August, 2014
|Book Closing Date||18 August, 2014|
|Issue Date||Late August, 2014|
|First Day Trade||Early September, 2014|
Warrants: Equity Needs
Does IVL have a target Debt to Equity level?
IVL will consider the current circumstance such as cost of debt, debt levels, and funding needs, etc. to formulate the optimal D/E ratio. However, IVL has an internal, self-imposed, Net Debt to Equity level of 1.5x.
Can you please provide a breakdown of the Use of Proceeds?
The proceeds will be used to finance “New Opportunities in addition to Plan 2018” which are low-cost shale feedstock and high margin HVA businesses to complement IVL’s current competencies.
What is the estimated CAPEX for “New Opportunities in addition to Plan 2018”? How is this number estimated, especially for M&A opportunities? Is the warrant sufficient for such CAPEX?
IVL estimates that it will need approximately USD 3,400m (THB 108,800m) as CAPEX to finance “New Opportunities in addition to Plan 2018” (upstream integration low-cost shale gas feedstock, various M&As). The CAPEX for M&A opportunities was estimated based on due diligence and IVL’s past experience with M&A expansions.
IVL estimates that it will need to raise approximately USD 1,000m (THB 32,000m) in equity to finance these projects. Together, the warrants are estimated to be able to generate a maximum of USD 1,039m (THB 33,255m), which is sufficient to meet estimated equity needs.
If it turns out IVL receives insufficient equity proceeds as a result of some warrant holders not exercising their rights, what is the alternative financing for the future projects?
If insufficient warrants are exercised and IVL has a shortfall of capital for committed projects, we have various choices of equity financing, such as Private Placement, Rights Offering, and Public Offering. We can also consider hybrid sources of financing such as a Perpetual Bond.
Pursuing any of these choices depends on market conditions at that time and other relevant factors.
If the Warrants are in-the-money by the first exercise period and not enough Warrant holders exercise their rights, how will IVL raise enough money to cover equity needs?
We can also consider hybrid sources of financing such as Perpetual Bonds to bridge the gap.
What are Perpetual Bonds?
A bond (or debenture) with no maturity date. Perpetual bonds are not redeemable but pay a steady stream of interest forever and may be accounted for as equity, not debt.
In the situation where only some of the “New Opportunities in addition to Plan 2018” materialize but are enough for IVL’s stock price to become in-the-money, what is IVL’s plan for the use of excess proceeds?
In this case, IVL can use the excess liquidity to repay debt, subject to appropriate corporate approval and market conditions. In any case, IVL is constantly looking at potential opportunities and foresees many opportunities arising in the future. Excess proceeds will provide IVL with the flexibility to invest in other projects in the future.
Warrants: Dilution Effects
What is the maximum control dilution? What is the maximum price dilution?
Maximum control dilution for IVL-W1 = 9%*. Maximum control dilution assumes that all existing shareholders who are issued warrants trade their warrants to only non-existing shareholders, who then fully exercise the warrants. Nonetheless, there will be no dilution whatsoever if existing shareholders who are issued warrants choose not to trade away their warrants.
* Calculated as # of shares reserved to accommodate the exercise of IVL-W1 / (total issued shares of IVL + # of shares reserved to accommodate the exercise of IVL-W1)
Maximum control dilution for IVL-W2 = 7%*. Maximum control dilution assumes that all existing shareholders who are issued warrants trade their warrants to only non-existing shareholders, who then fully exercise the warrants. Nonetheless, there will be no dilution whatsoever if existing shareholders who are issued warrants choose not to trade away their warrants.
* Calculated as # of shares reserved to accommodate the exercise of W2 / (total issued shares of IVL + # of shares reserved to accommodate the exercise of IVL-W2)
Maximum control dilution for IVL-W1 and IVL-W2 = 15%*. Maximum control dilution assumes that all existing shareholders who are issued warrants trade their warrants to only non-existing shareholders, who then fully exercise the warrants. Nonetheless, there will be no dilution whatsoever if existing shareholders who are issued warrants choose not to trade away their warrants.
* Calculated as # of shares reserved to accommodate the exercise of IVL-W1 and IVL-W2 / (total issued shares of IVL + # of shares reserved to accommodate the exercise of IVL-W1 and IVL-W2)
Maximum price dilution = none. As the exercise prices of both IVL-W1 and IVL-W2 are set above the market price (before issuance), the price dilution is negative, and thus, none.** Calculated as (Market Price (Before Issuance) – Market Price (After Issuance)) / Market Price (Before Issuance)
Market Price (After Issuance) = ((Market Price before Issuance * total issued shares of IVL) + (Exercise Price * # of shares set aside for warrant issuance)) / (total issued shares of IVL + # of shares set aside for warrant issuance)
Will major shareholders subscribe to the warrants?
IVL cannot comment on whether any shareholder will exercise warrants assigned to them prior to exercise. We do aim to receive the entire amount of capital planned for.