• Top Glove announced yesterday that its recently concluded US$200mil exchangeable bond issue actually comes with a “stock borrow arrangement” where Top Glove controlling shareholder Tan Sri Lim Wee Chai lends bondholders Top Gloves shares to the tune of 2.1% of Top Glove’s outstanding shares (translating to about 54mil shares), allowing them to short sell the stock.

• Recall, the bonds are convertible into 131.2mil new Top Glove shares at a ratio of 656 new Top Gloves shares for every US$1,000 bonds surrendered at a fixed exchange rate of RM4.0703 per USD, translating to an effective exercise price of RM6.204.

• We believe the arrangement allows bondholders to immediately lock in Top Glove share price if it starts to perform (i.e. surpasses the RM6.204 exercise price). For instance, if Top Glove share price is to hit RM6.50, the bondholder could sell the borrowed shares at RM6.50 in the open market, and subsequently convert its bonds into new Top Glove shares at RM6.204 to return to the lender, effectively locking in the targeted return on his or her investment in the bonds.

• The arrangement will effectively increase the free float of Top Glove shares by 2.1%, which may be perceived as “share overhang” under a weak market condition. Nonetheless, it should not affect the fundamentals of the stock. There are no additional shares being issued, and hence no EPS dilution.

• Meanwhile, Top Glove also disclosed that an estimated RM630.9mil of the bond issuance proceeds will be utilized to repay syndicated loans used to fund the acquisition of Aspion and RM169.4mil will be used to repay the borrowings taken to fund the group’s working capital.

• The repayment is expected to save RM16mil in interest p.a. as the bond is priced at a 2% p.a. interest compared with the estimated 4% p.a. it is paying for the said borrowings.

• We maintain our BUY call with an FV of RM6.34 based on DCF.

Source: AmInvest Research - 5 Mar 2019