April 13, 2014

ALI says AC unit’s exchangeable bonds will not cause any dilution

In its disclosure to the Exchange, Ayala Land Inc (ALI, Buy) clarified that the US$300m exchangeable bonds issued by AYC Finance (a wholly-owned unit of Ayala Corp) will not cause any share dilution to ALI shareholders. The bonds can be exchanged for ALI shares at an exchange price of P36.48 starting 11 June 2014. However, the ALI shares backing the bonds are owned by AC and will not come from the 1b carved out ALI common shares that was approved for issuance at a later time by the board. AC currently owns 48.9% of ALI.

Our take: ALI’s share price fell 2.8% last Friday on initial concerns regarding a possible dilution resulting from the exchangeable bonds. There were also concerns on the potential supply overhang that the release of the underlying shares will cause. While we note that the latter concern may be valid, we believe that the benefits of increased free float (equivalent to ~2.6% of ALI’s total outstanding shares) in terms of potential additional index weighting for ALI should outweigh the disadvantages.

Meanwhile, the 1b in new carved out ALI shares remains a bigger concern as its issuance will lead to a 7.06% share expansion for ALI. The key here is the timing (“not within one or two years” according to the new ALI president) and manner of issuance (either in one issuance or several tranches). The last issuance by ALI (1b in carved outshare) was done in two tranches and issued a year apart. The proceeds were used toacquire the FTI property from which ALI was able to immediately sell some commercial lots to generate earnings that partly offset the share dilution.– WealthSec