Seven Group opts for exchangeable notes to raise $250m

Following yesterday’s decision by Seven Group’s (ASX: SVW) board and management to sign-off on the rarely-seen-in-Australia exchangeable bonds structure, the company has advised this morning that it has successfully priced its offer of $250m senior exchangeable notes, due 2027, at a fixed coupon of 4.62% per annum.

Exchangeable bonds are uncommon in Australia as they can only be considered where one listed company has a cross-shareholding in another. In this case, Seven Group owns 69.6% of Boral (ASX: BLD), and as such the latter is only dragged into the deal due the Seven Group being its biggest shareholder.

Refinancing convertible notes

In an attempt to refinance its Singapore-listed convertible notes – which go back to March 2018, when it sold 3500 notes with a $350m nominal value - Seven Group opted for exchangeable bonds structure and in so doing has potentially put a 6% stake in building materials group Boral on the line.

The new notes mature in five years, with an option in the investors’ favour in three years and will be exchangeable into fully paid ordinary shares of Boral at an initial exchange price of $3.77 per share.

This represents a premium of around 30% to the October 6 closing price of Boral shares (last traded at $2.90) and settlement of the offer is expected around 18 October.

66.3m Boral shares

While there are technically 66.3m Boral shares on the line, there’s every likelihood the deal will be refinanced before investors ever get the chance to take the Boral shares – similar to how Seven Group has refinanced its convertible notes ahead of time.

Seven Group retains the right to buy Boral shares in the block trade.

It’s understood the offer of new notes was significantly oversubscribed.

The bulk of the funds subscribed was from new money and not from holders of Seven's existing notes, due 2025, electing to sell those back to Seven in the concurrent repurchase.

Seven has limited the concurrent repurchase to $114.2m, with the surplus funds raised used to repay existing bank debt.

Seven Group was up around 1% an hour out from the open while Boral was down -0.17%.

Consensus on Seven Group is Strong Buy.

Based on Morningstar’s fair value of $22.60 the stock appears to be undervalued.