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Sasol to offer R14bn in dollar bonds

Sasol has announced that its US financing subsidiary has started the process to issue dollar-denominated bonds to the value of $740 million (close to R14 billion). The proceeds will largely be used to repay existing debt facilities falling due within a few weeks.

The offer of convertible bonds follows the issue of R15 billion worth of rand-denominated bonds a few weeks ago, which was also undertaken to repay due debt.

Sasol Financing USA LLC will issue the new senior unsecured convertible bonds, guaranteed by Sasol Limited. The new five-year bonds will mature in November 2027.

Debt

According to its latest annual report, Sasol had debt of some R16.4 billion at the end of its financial year at end June 2022. The rand amount of this dollar debt that falls due at the end of November is probably much higher now due to the decline in the rand from R16.50 per dollar at the end of June to the current R18.20.

That Sasol is raising less than the amount it obviously needs to replace the maturing debt shows that things are going well at the international energy and chemical group.

Management notes in the announcement of the new bond offer that the net proceeds will be used for more than just rescheduling existing debt. “The offering [is] expected to be used for general corporate purposes, including, but not limited to, the refinancing of debt,” it says.

The new convertible bonds will be offered to qualifying investors and will be issued on or around 8 November 2022.

Interest rate

Sasol estimated, in its initial announcement on Tuesday, that the bonds are expected to pay a coupon of between 4% and 4.5% per annum. It announced later in the day that the pricing was eventually fixed at 4.5%.

The R16.4 billion that is repayable now also had a fixed interest rate of 4.5%.

While the interest rate is just about the same, it still shows an improvement if one considers that interest rates have increased sharply. For instance, the Secured Overnight Financing Rate (SOFR) for dollar-denominated debt increased from close to zero percent at the beginning of 2022 to the current 3.05%.

The degree to which Sasol’s financial standing has improved in the eyes of investors can be seen in the fact that it is still paying SOFR plus 2% on some R23 billion of debt that is due in June 2024.

It is also paying fixed rates of between 4.4% and 6.5% on dollar debt worth R62 billion that is due between 2024 and 2031.

The latest financial statements show that Sasol had R104 billion in long-term debt at the end of June 2022, with R22 billion of this repayable within 12 months of the date of the balance sheet.

The debt was largely unchanged from a year ago, but cash balances improved as profit increased from R10.5 billion in the 2021 financial year to R41.7 billion in the last year. Cash flow from operating activities improved from R34.5 billion to nearly R41.2 billion.

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Sasol had cash of nearly R43 billion at the end of June 2022, compared to R30 billion at the end of the 2021 financial year.

Conversion rate

The group based the conversion ratio of the convertible bonds on its share price on Tuesday, 1 November, using a weighted average price of the day’s trading, plus a large premium of 30% to the calculated price.

It published a separate Sens announcement after the close of the JSE on Tuesday to say that it will convert the bonds into Sasol shares at a price of approximately $20.38 per share when they mature in five years’ time. This compares to the day’s closing price of $15.62 per share (R285 at an exchange rate of R18.24 per dollar).

This represents something of an out-out-of-the-money position for investors, but it is likely that Sasol’s share price will be higher than the ‘strike price’ given Sasol’s outlook.

Only time will tell if the bond holders will benefit in addition to the 4.5% annual interest payments.

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“The convertible bonds will be issued at 100% of their principal amount in minimum denominations of $200,000 each and, unless previously redeemed, converted or purchased and cancelled, each will be redeemed at their principal amount on or around 8 November 2027,” according to the announcement.

“The convertible bonds will pay a coupon of 4.5% per annum, payable semi-annually in arrears and in equal instalments on 8 May and 8 November of each year, with the first interest payment date on 8 May 2023.

“The initial conversion price is $20.3863, representing a premium of 30% to the volume weighted average price of the ordinary Shares listed on the main board of the JSE between opening of trading and pricing today, 1 November 2022, translated into US dollar using the exchange rate at the time of pricing.”

It adds that the conversion price will be subject to standard market anti-dilution adjustments pursuant to the conditions, including events such as dividends.

However, Sasol also has an option to redeem the convertible bonds at their principal amount (plus accrued but unpaid interest) in accordance with the conditions at any time on or after 29 November 2025, if the parity value equals or exceeds $260 000 for a specified period of time, or if, at any time, 85% or more of the principal amount of the convertible bonds originally issued has been converted and/or redeemed and/or purchased and cancelled.

Sasol will apply for a listing of the bonds on the Open Market (Freiverkehr) segment of the Frankfurt Stock Exchange within 30 days following the closing date of the offer.

Listen to this MoneywebNOW podcast with Simon Brown about whether a recent Sasol update means there is an opportunity for investors:


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