F&N plays hardball with bond investors

* Sale of core assets could trigger technical default

* Bondholders could get paid less than market prices

* Investors complain of unfriendly consent solicitation

By Kit Yin Boey

SINGAPORE, Nov 1 (IFR) - The Thai owners of Singapore blue-chip Fraser & Neave are heading for a showdown with bondholders over plans to spin off the group's core property asset.

F&N has launched a consent solicitation exercise for S$808.25m (US$652.7m) of outstanding Singapore dollar bonds to avoid triggering an event of default from the listing of Frasers Centrepoint and to pay down the debt ahead of maturity.

The process, however, has kicked up a storm in the investor community. Investors are generally unhappy with the redemption structure, a lack of communication from the company and the threat of a technical default.

"The crux of the problem is that F&N is taking a hardline view - take it or leave it to default. You can't treat investors - who have supported you in the past and who will be needed to support you in the future - like that," said one investor.

The consent exercise comes after F&N obtained regulatory approval to spin off its property arm Frasers Centrepoint into a separate listing.

The property assets are a core business in the F&N group, contributing about 60% to the group's revenues. This will leave F&N, which intends to remain listed, as a smaller company with interests mainly in food and beverage businesses.

The spin-off will breach certain covenants in the bonds, meaning F&N needs to obtain bondholder consent to waive an event of default. The exercise also includes the addition of a call option on or before June 30, 2014 in all the notes, as F&N intends to redeem the six outstanding bonds after the spin-off.

F&N has decided on a redemption payment structure, where the respective bondholders will receive the nominal principal sum, accrued interest, an early bird consent fee of 25bp and a pre-payment fee equal to half of the coupon.

This structure will mean that some investors are in line to receive more than the market value for their notes, while others will lose a fair bit.

One investor holding F&N's 5.5% notes due 2016 estimated that he would get only 103 cents on the dollar versus the current market value of 107. "I lose 4 points, while those holding the 2.48% 2016s will gain. Why should I be penalised just for holding a higher-paying coupon bond for the same maturity?" he added.

THREAT OF DEFAULT

Such complaints have met with little sympathy from F&N.

"F&N will be a very different company now with FCL carved out. We appreciate their support in the past. The consent exercise provides them a prepayment fee and a consent fee. If consent is not obtained, then an event of default will occur and under the terms and conditions of the notes/bonds, repayment will be at par," said a spokesperson for F&N.

If bondholders do not approve the changes, F&N could simply breach covenants and then cure a technical default by repaying investors at par.

A technical default by a blue-chip company in Singapore is unheard of and will cause waves in the bond market. It also points to an aggressive approach to the capital markets by F&N's new owners.

After F&N was acquired by Thai billionaire Charoen Sirivadhanabhakdi in a US$11.2bn takeover earlier this year, some bondholders said there was little engagement from the new management on the impact on their assets.

The news of the FCL spin-off also came as a surprise to some investors, who complained that there was no discussion of the development or the impact on their investments even though it was a potential technical breach. They also said the consent solicitation structure was imposed on them with no preliminary consultation.

"That lack of engagement in the early stage set the stage for some unhappy investors," said one credit analyst at a fund company. "We had asked many times for meetings with the management but we were told they were not keen to meet."

This was disputed by the F&N spokesman. "We met those who had requested for meetings with the F&N management, but declined requests for meetings with FCL management and we also met institutional investors as part of the demerger roadshow to promote and explain the demerger and some of them had included members of their credit teams as well," he added.

The spokesman pointed out that the company had to be consistent and fair to all noteholders and bondholders by finding a middle ground, but acknowledged that not all of them would be happy.

"To be fair to the investors we met, we had not worked out the consent solicitation process at that time, but we certainly shared the impact of the demerger with them."

The six outstanding bonds are a S$150m 3.62% due 2015, S$108.25m 5.5% due 2019, S$200m 6.00% due 2019, S$50m 2.45% due 2015, S$220m 2.48% due 2016 and S$80m 3.15% due 2018.

The early bird deadline is on November 7, while the consent exercise ends on November 12 with a bondholder meeting scheduled for November 14. In short, resolution will come very soon, for better or for worse. (Reporting By Kit Yin Boey; Editing by Christopher Langner and Steve Garton)