TEMASEK TO RAISE UP TO $800M WITH BOND OFFER Ownership: Aaron Low Publisher: The Straits Times, SPH Limited

Published Date: 19th October 2011 1. SUMMARY OF CRITIQUE

The news critique touches on the unusual exchangeable bond issued by Temasek Holdings (TH).

Purpose & Implication of Bond It allows TH to meet its investment objectives and rebalance its portfolio. It has also indirectly caused Standard Chartereds (StanChart) share price to fall. Targeted Type of Investors Its targeted group of investors are risk-adverse investors. Gain/Loss from Investors Perspective Investors will profit from the difference between spot market price and pre-set price of StanCharts shares if share price rises above the pre-set price. In contrast, investors will lose the time value of their principal investment if the above scenario does not happen. Interest Costs from THs Perspective TH enjoys lower interest through the issuance of such exchangeable bond.

Besides the price of StanCharts shares, the EUR-SGD exchange rate is also an important factor in the consideration of the investment.

2. INTRODUCTION TO NEWS Appendix A: TH has announced to issue an unusual zero-yield 3-year exchangeable bond worth S$650 million to institutional investors on 17th October 2011. It also includes a greenshoe option that allows the underwriter to raise bond issue by S$150 million if it is over-allocated. Being an exchangeable bond means that the bond holders can exchange their bonds for StanChart shares any time during the next three years at a pre-set rate of S$3,629 per lot of shares. In cases where the bond holders do not wish to exchange for the shares, he will get his initial investment back upon maturity.

PURPOSE AND IMPLICATION OF THE BOND OFFER As reported, the bond allows TH to meet its investment objectives and rebalance its portfolio. The bond has also indirectly caused StanChart share price to fall almost 3% the next day of trading (18th Oct) after the announcement of bond is made: Appendix B. This is because it implicitly conveys that StanCharts shares are not as valuable to hold as compared to other companies; hence, explaining the offload of investment in StanChart.

3. TARGETED TYPE OF INVESTORS

The unusual bond was well-received and over-subscribed by S$140 million. The bond is popular among risk-adverse financial institutions; who want to have a stake in StanChart, because of the lower implied volatility than the stock itself. It also provides the investors with a principal-protected option that allows investor to buy into a banks shares without the risk of losing his investment. Other than those mentioned, the bond is considered as low-risk as the return of the initial investment is guaranteed in event that the bond is not redeemed.

4. SCENARIO (1): GAIN ON INVESTMENT FOR BOND HOLDERS

For a gain to materialise for the bond holders, the market price during the next three years at any time for StanChart must go beyond the pre-set price of S$36.29 per share at the prevailing exchange rate. Assuming, the market price of StanChart upon maturity of the bond is S$4,000 per lot and a particular investor holds S$50,000 worth of bonds. The bond holder, reasonably a rational one, will definitely redeem his bonds. In this case, he will be eligible to receive around 13 lots of shares. Assuming he sells immediately at $4,000 per lot after his redemption, he will be able to get back $52,000. This leads to a gain of $2,000, yielding 1.32% from a bond investment of $50,000.

5. SCENARIO (2): LOSS ON INVESTMENT FOR BOND HOLDERS Whereas, if StanCharts shares do not go beyond the pre-set price of S$3,629 per lot at any time during the next three years, a rational bond holder will not redeem his bonds. He will then be entitled to recover his original investment sum with no interest, upon maturity. He hereby loses the time value of his original investment amount. Being a triple-A rated entity, the required rate of return of investors for THs bond will be slightly higher than that of a 3year T-Bond; which is about 0.3% per annum (Appendix C) due to the additional liquidity and default risk premium. Taking it as a gauge, a particular S$50,000 bond holder will suffer a loss of time value amounting to at least S$451.35 over the 3-years.

6. INTEREST COSTS FOR TEMASEK HOLDINGS The bond creates a win-win situation for TH regardless the occurrence of scenario (1) or (2). In scenario (1) whereby StanChart shares rose above pre-set price: Reasonable assumption is that a company will always try to minimise losses and maximise profits. Hence, it can be concluded that the pre-set price is very close to THs purchase value of the stock (be it lower or higher). Thus, TH will not incur substantial losses in event that the pre-set price is lower than purchase price and all the bonds are redeemed. TH might even gain on the exchange if the pre-set price is slightly higher than its purchase price. Other than that, TH will still keep its status as the biggest shareholder in StanChart (retaining 17% stake; a 1.2% drop from 18.2%) even if all bonds are redeemed. In scenario (2) whereby bonds are not redeemed for the shares: TH will then have borrowed the S$790 million interest-free. In either case, TH will be paying less interest than what they should pay for S$790 million which estimated to be at least S$7.13m over 3 years by using the average yield for SGS Tbond as a benchmark. Other than that, what TH also earned is an opportunity to offload its investment to investors and rebalance its portfolio.

7. CONCLUSION Other than the above-mentioned scenarios that lead to gain or loss for investors, EUR-SGD exchange rate is also a critical factor that an investor should consider before making an investment. It plays a role in decision-making as the pre-set price is set in SGD. Unfavourable exchange rate will reduce the price of StanCharts share when converted from EUR to SGD and vice versa. Hence, it will be comprehensive for an investor to look at the trend of EUR-SGD exchange rate as it will affect the probability of his profits on the investment.

Total Word Count: 997 (Not Including Title, Appendices & References)

8. APPENDIX Appendix A Newspaper article published by Straits Times, written by Aaron Low on 19th October 2011: Temasek to raise up to $800m with bond offer SINGAPORE investment firm Temasek Holdings is raising up to $800 million from large investors by selling a type of bond rarely seen here. The deal involves investors buying bonds that can be exchanged for Standard Chartered Bank shares at a pre-set price. Temasek is Stanchart's biggest shareholder, with a stake of about 18.2 per cent. The bond sale allows it to generate cash from its stake in the bank without having to sell its shares now. Institutional investors, on the other hand, get to take a punt on Stanchart shares rising, with minimal risk of losing their capital. This is how it works: These 'zero coupon' bonds, which mature in 2014, do not offer a payout. Once they have bought the bonds, investors can ask to exchange the bonds for Stanchart shares any time during the next three years. Temasek can either deliver the shares - in other words, paring its Stanchart stake - or give the investor cash. As the conversion price is fixed at $36.29 per share, a 27 per cent premium over the stock's closing price on Monday on the London Stock Exchange of 14.29 (S$28.50), an investor will want to get shares only when the price is above $36.29. If the share price falls below $36.29, he will keep the bonds. Yesterday, during trading, Stanchart shares fell to about 13.73. Its highest level in the past year is 19.75, or $40. If the investor decides not to redeem his bonds during the three years, he will get his initial investment back at the end of the period. Temasek is initially selling $650 million of bonds, but said there is a 'greenshoe' option to lift the size of the bond offering to $800 million. If all the bonds are redeemed for shares, Temasek's stake in the bank will fall to 17 per cent. Temasek holds about 430 million Stanchart shares worth about 5.9 billion. Temasek said it was pleased with the market response to the exchangeable bonds (EB) programme. It allows Temasek to 'meet our investment objectives and give us an opportunity to rebalance our portfolio'.

The proceeds of the bond issue will be used by Temasek to fund its 'ordinary course of business', it said. Investors stand to profit if Stanchart's share price soars despite the turmoil facing European banks. However, it is hard to tell if Temasek will make a loss or profit if bonds are exchanged for shares at the $36.29 level. Temasek first bought an 11.5 per cent stake from the late Mr Khoo Teck Puat's estate back in 2006. Then, Stanchart shares were trading at 15.24, or $43.26 at the prevailing exchange rate $2.90, a share on the London Stock Exchange. Over the years, Temasek has built up the stake to 18.2 per cent without disclosing the price. This makes it difficult to estimate what each share cost for Temasek. It has, however, suffered an exchange rate loss. Back in 2006, 1 was worth $2.90, but it has been sliding in recent years to hit about $2 yesterday, a drop of more than 30 per cent. Such exchangeable bond issues are rare here and one that only Temasek, with its strong credit rating, can pull off, said analysts. As Mr Kevin Scully, managing director of financial advisory firm NRA Capital puts it: 'It is basically a principal protected option that allows you to buy into a bank's shares without worrying that you will lose your investment.' He noted that investors looking for safe investments are likely to get only 1 per cent or slightly more, so the opportunity cost to get into a deal like this is low. 'But 27 per cent over three years may be a bit hard to get, given that European banks are in such a mess now,' he said. For Temasek, the deal does sound 'quite sweet', said APS Asset Management chief executive Wong Kok Hoi. 'Temasek gets liquidity out of its holdings without needing to pay a yield to investors,' he said. Likewise, a source close to the deal told Reuters: 'If it were selling its stake (now), that would have gone out at a discount to the current market price, or very close to it. 'This way, it has either got a sale price of 27 per cent premium to the current market price, or it has got zero per cent money for three years.' The offer is now open, and closes on Tuesday next week. Bank of America Merrill Lynch is the lead manager and sole bookrunner of the bond offer.

Appendix B Graph provided by London Stock Exchange on StanCharts shares price on 17th & 18th October 2011:

Appendix C Graph is plotted based on data provided by Monetary Authority of Singapore on SGS Treasury Bills Prices and Yields.
0.5 0.45 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 27 9 19 30 8 17 28 7 18 27 5 17 26 7 16 27 6 17 27 Apr 2011 Aug

Yield Average Yield

9. OTHER REFERENCES Aaron, L. (2011, October 19). Temasek to raise up to $800 million with bond offer. The Straits Times. Retrieved from The Straits Times Online. Retrieved from http://www.straitstimes.com/BreakingNews/Money/Story/STIStory_724929.html. Temasek to raise up to S$800m in bond issue (2011, 19th October). TODAY Newspaper. Retrieved from TODAYonline. Retrieved from http://www.todayonline.com/Business/EDC111019-0000175/Temasek-to-raise-up-toS$800m-in-bond-issue. Robin, W., Sharlene, G. (2011, 18th October). Financial Times. Retrieved from Financial Times Online. Retrieved from http://www.ft.com/intl/cms/s/0/971f46f0-f9a9-11e0-9c26 00144feab49a.html#axzz1cG8GPcmY

London Stock Exchange. (2011). Standard Chartered Shares. Retrieved October 30, 2011 from http://www.londonstockexchange.com/exchange/prices-andmarkets/stocks/summary/company-summarychart.html?fourWayKey=GB0004082847GBGBXSET0

Temasek Holdings. (2011). Major Portfolio Companies. Retrieved October 30, 2011 from http://www.temasekreview.com.sg/portfolio/major_companies.html Tan, K.L. (2011, 19th October). Temasek Convertible Bond. Retrieved October 30, 2011 from http://tankinlian.com/admin/file.aspx?id=578 Singapore Government Securities (2011). Historical Prices. Retrieved October 30, 2011 from https://secure.sgs.gov.sg/fdanet/TreasuryBillPricesAndYields.aspx# Foley, J. (2011, 19th October). Clever Clogs. Retrieved October 30, 2011 from http://www.breakingviews.com/temaseks-stanchart-bond-looks-too-clever-byhalf/1611758.article