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ICHEM Bond Auction - 1.5bn

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Polvek Tybor Imperial Chemical Industries	Posted - 2008.02.18 23:58:00 - [1] Hi all For those of you who've never heard of Imperial Chemical Industries [ICHEM] here is a quick background. ICHEM is a small moon mineral reaction company which currently runs two medium reactors supplying the industrialists of EVE with intermediate moon minerals. The business has been running for around 2 months and I issued the first tranche of public debt 5 weeks ago. Since then I have been preparing regular sets of public accounts every two weeks. Since the last report our business and profitability has picked up significantly but it remains a struggle to keep the reactors operating at full capacity. Therefore I'd like to come to the market again with a further issuance of our medium term notes to raise 1.5 billion ISK. The cash will be invested in a freighter (1bn), insurance (300m) and working capital for the business (200m). The major limiting factor of ICHEM so far has been limited haulage ability. With the freighter I am confident that the business can maximise profits and gain the logistics capacity to expand into further reaction activity in the future. Proposed Offering The debt would be issued on the same terms as the existing bonds - in effect they will be identical notes. Par value (Capital): 1,500 notes of 1m ISK each. Coupon (Interest): 10% per month (paid at 5% every 2 weeks). Maturity: Redeemable at par plus unpaid interest at ICHEMs discretion but no later than 4 months from the date of issue. Registration: The notes will be bearer instruments. Interest and capital are repayable to the legal holder (per corp screen) on the coupon / redemption date. ICHEM already has 500m of identical securities in issuance which have so far paid out 75m in interest (10% x 1.5 months). Market Pricing Here is the new bit that I hope some of you might appreciate. In the spirit of introducing some some content in our meta-game I'd like to gauge interest in a new way of using the market to price these bonds in a similar way to real life markets. That is I would like to issue them at a premium/discount based on the market demand. The goal is to allow the free market to price the cost of the bonds for ICHEM (and maybe similar issuances in the future). Here is how it works in a nutshell. Any bond is known as a 'fixed income' investment. The obvious reason is because, barring default, the amount an investor receives is fixed. For the ICHEM bonds the company promises to pay you a sum total of 1.4m for every bond you hold (ie 1m principal and 0.4m of interest at 10%pm) per the terms above. However, the new bit is that I'd like to auction these bonds in the open market (MD) to find out what the 'real' interest rate I pay will be. For instance. You think that 10%pm is a great return and ICHEM is a solid investment. You offer to buy the notes at a 0.1m premium (ie. you'll pay 1.1m for a bond with principal value of only 1m). The reason you'll do this is because you're getting 1.4m back through its life. If you offered the 1.1m for the notes you would get a 'real' interest rate (or yield to maturity) of 1.4/1.1 = 27% which is 7% per month. In this way you guys can determine what interest rate ICHEM pays and you receive. Clearly this is a premium over par value. It works just the same way if you want to pay less than 1m per note (ie a discount) then the yield to maturity will be >10%. So the market can determine how much any bond returns based on the perceived risks and supply/demand. Auction Process If there is sufficient demand (and the interest rate is acceptable for ICHEM) I'd like to issue the notes this Sunday. To set the price I'd like to use this thread to conduct a special type of auction. Cont. below
Polvek Tybor Imperial Chemical Industries	Posted - 2008.02.18 23:58:00 - [2] Reserved
Polvek Tybor Imperial Chemical Industries	Posted - 2008.02.19 00:14:00 - [3] Edited by: Polvek Tybor on 19/02/2008 00:14:59 Originally by: Kazuo Ishiguro Put me down for 500m please. Wow - that was quick! Thanks for the offer, it's much appreciated. But what price? One of the things it would be good to achieve with the proposed auction format is that it makes it less first-come first-served and more of a free market. Or do you think it's a pain in the ass and I should just take your money and be grateful?
Polvek Tybor Imperial Chemical Industries	Posted - 2008.02.19 21:51:00 - [4] Hi all Sorry if there was some confusion. Let me try to set the record straight. The sum total of bonds for sale is 1.5bn. Those 1.5bn of bonds will go to the highest bidders. However, all of those successful bidders pay the same price - the lowest winning bid. That way every single investor who is above the cut-off point pays less than or equal to what they were willing to pay. In my example: Investor 1 commits to take 500m @ 1.20m Investor 2 commits to take 500m @ 1.15m Investor 3 commits to take 500m @ 1.10m Investor 4 commits to take 500m @ 1.05m I should be clear that investors 1-3 are winners. They each get 500m of bonds to come to the total of 1.5bn. Investor 4 is unsuccessful and does not get any bonds (and doesn't pay either of course). However, despite bidding above the highest winning bid (1.10m) investors 1 and 2 still only pay 1.10m. Originally by: FastLearner There's one HUGE point which needs to be clarified for this to work. The OP says that the bonds will be repaid "no later than 4 months from the date of issue". That's NOT the same as the bonds having a fixed life of 4 months. As it stands someone who offered 1.1m per bond could find themself being bought out for 1.05m per bond after 2 weeks. Unless the life of the bonds has a cast-iron minimum (rather than maximum) set there's no way anyone should be bidding over the bare minimum. You're absolutely right Fastlearner. The bonds can be early redeemed, however, the redemption terms per above are: Maturity: Redeemable at par plus unpaid interest at ICHEMs discretion but no later than 4 months from the date of issue. Therefore, if ICHEM chooses to redeem early then you will still get the full 1.4m per bond. Clearly this is not so good for ICHEM so I'm pretty unlikely to redeem early. Originally by: Kazuo Ishiguro Ok, the whole supply of shares is now accounted for. Do we continue bidding until Sunday, or are you going to sell the whole lot (Ambo gets 300 and everyone else gets what they asked for) at 0.9m, the least bid that is currently going to be supplied? I'd be happier if you just wrote down a set price and stuck with that. Also, there's no risk to you of being saddled with a 22% dividend... I would really like as many investors as possible to keep bidding for bonds. At the close of the auction on Sunday the top 1.5bn of bids will 'win' and will get the bonds at a price set by the lowest winning bid. Everybody else had the option of upping their bid prior to Sunday but obviously wasn't willing to accept as low an interest rate as the winners. I hope that using this system ICHEM pays the lowest rate the market will bear, it's not a first come first served system and ICHEM allows a free market mechanism decide the price of the debt (hopefully lower ). Originally by: EBANK Ricdic So is this a dutch auction? I think a true Dutch auction is done with private sealed bids. This is similar I think but more transparent. Anyway, if something else is unclear then please let me know. Many thanks to those who are willing to invest so far. Although jna you're asking for a monthly return of 16% with your bid of 0.85m - you should put a yaaarrr on the end of that Cheers Polvek
Polvek Tybor Imperial Chemical Industries	Posted - 2008.02.20 00:04:00 - [5] Originally by: Ahn Riane I would like to see the some more points clarified. 1- When will this auction end exactly, and are there any requirements to be met by then? 2- do you have any kind of reserve? eg, what if the bids at the end of auction dont met what you consider to be a fair deal? 1. How about we set the end of the auction at 1200 EVE time on Sunday. Bids not in this thread before then don't stand. I didn't think people would really want to snipe but you're right that there should be a formal end. 2. In my first post I did say that if there was simply insufficient demand that the interest rate would be too high then I wouldn't be able to go ahead. However, I clearly want the money for a good purpose so it would have to be pretty darn high for me not to accept. I'd be wary of setting a formal public reserve as it might distort the market if there is a known cap level. In case anyone is wondering what the score is currently. By my reckoning if the auction ended now (and I emphasise it doesn't until 1200 Sunday) then this would be the result: Winning Bids 1. Ahn Riane 100 bonds @ 1.05m each 1. Raskor 50 bonds @ 1.05m each 3. Scipio Divinitus 200 bonds @ 1.00m each 3. Kazuo Ishiguro 500 bonds @ 1.00m each 5. Ambo 550 bonds @ 0.95m each 6. Lo Lightshard 100 (out of 450 requested) @ 0.90m each This would result in all the above receiving their requested amount (apart from Lo who gets the final 100m bonds) and all paying 0.9m for each bond. That results in a yield to maturity for the bonds of 14% per month which would accrue to each investor above. If this were the end of the auction I would indeed accept this rate and issue the bonds gratefully (if slightly grudgingly). To make it also clear this is paid as an interest payment of 10% per month (5% every two weeks) and a lump sum of 1m each bond at maturity. Thanks guys/girls - it's much appreciated. Now if a few of you could just bid a bit more for the bonds so I'm not paying 14% per month that would be great!
Polvek Tybor Imperial Chemical Industries	Posted - 2008.02.20 22:24:00 - [6] Originally by: Shadarle Well there are two issues now that I read through everything. First, will this definitely run for 4 months? If it runs for less then it significantly reduces the monthly ROI if you pay over 1 mil per. So it seems this should have a set length of 4 months, not a variable length with a max of 4 months. Otherwise people could wind up paying 1.1 mil per and you pay back the bonds at 1.05 mil after half a month for example. Thus you've earned .05 mil per bond and the investor has lost that much. If the bond redeems early it will pay 1m per bond (the par value) plus any unpaid interest. What I'm trying to get across (maybe not so well) is that anyone who buys a bond will get 1.4m each. If ICHEM pays it back early you still get 1.4m - just quicker. It's pretty unlikely I would early redeem of course but wanted to have the option. Originally by: Shadarle Second, to all the people doing calculations. The question of 5% bi-weekly or 10% monthly is meaningless. In the end it will pay back at best 1.4 mil per bond in 4 months. So all calcs should be based off of this (assuming it is guaranteed to last 4 months). So if you pay 1.1 mil per you are getting 1.4-1.1 =.3 mil per in 4 months. If you pay 1 mil you get .4 mil per in 4 months. The interest on the bond is 10% per month. This is paid in ISK in installments twice per month. But you're also right that the total return on the bond includes any discount/premium paid upfront. The way I would work this out is simply how much you get back over how much you invested. So if you pay 1.10m per bond: 1.4m (total return paid) / 1.1m (invested) = 27% total return. I divide that by the 4 month life and you get 7% per month. Thanks to everyone for bidding so far. It's appreciate the support and I'm glad that this experiment in market pricing seems to be working out relatively well. If anyone is unclear what's going on please ask! Cheers
Polvek Tybor Imperial Chemical Industries	Posted - 2008.02.20 23:11:00 - [7] Edited by: Polvek Tybor on 20/02/2008 23:13:07 Quick update then. Per my counting the following are the currently winning bids: 1. Zelseus 100 bonds @ 1.15m each 2. Xulton 200 bonds @ 1.10m each 4. Ahn Riane 100 bonds @ 1.05m each 4. Raskor 50 bonds @ 1.05m each 5. Roguehalo 100 bonds @ 1.02m each 7. Ambo 475 bonds (out of 550 bid) @ 1.01m each 7. Treelox 475 bonds (out of 650 bid) @ 1.01m each [Thanks BTW!] The settlement price would be 1.01m each (the lowest winning bid) which all the winners will pay and equates to a return of: 1.4m / 1.01 = 38.6% 38.6 / 4 = 9.65% per month As you can see, since Ambo and Treelox both bid the same price I've allocated the remaining bonds equally.
Polvek Tybor Imperial Chemical Industries	Posted - 2008.02.21 07:45:00 - [8] Originally by: Raskor Not to quibble, but my bid was in well before Ahn's so why is her bid listed before mine? You're listed joint fifth - the actual order is just random though. In case of a tie I intend to allocate remaining bonds equally among those tieing (per Ambo and Treelox). This seemed fair and in the spirit of the auction. It doesn't matter how many bonds you want or when you bid (as long as it's before 1200 Sunday) - the only determinant is price. But if you guys think that's not fair then we can discuss. Thanks for the bid by the way.
Polvek Tybor Imperial Chemical Industries	Posted - 2008.02.21 14:25:00 - [9] Originally by: Banni Vinda Might I suggest that if you wish to split orders that are equally matched in price, you do it weighted by each order volume. It does seem unfair to punish the higher volume bid disproportionately to a lower volume bid at the same price. If the tie situation arises I would intend to weight by volume as you suggest. Would anyone have a problem with that? Sorry to be setting the rules mid-auction. At least this debate might establish some accepted 'rules' for similar auctions in the future.
Polvek Tybor Imperial Chemical Industries	Posted - 2008.02.22 19:59:00 - [10] Current status: 1. Zelseus 100 @ 1.15m 4. Xulton 200 @ 1.10m 4. Jna 500 @ 1.10m 4. Killer2 500 @ 1.10m 6. Raskor 50 @ 1.05m 6. Ahn 100 @ 1.05m 7. Treelox 50 (out of 550 bid) @ 1.03m This would result in a settlement price of 1.03m, payable by all the bidders above, and result in a yield to maturity of 9% per month.
Polvek Tybor Imperial Chemical Industries	Posted - 2008.02.24 15:35:00 - [11] The deadline has now passed which means the auction is officially over. By my reckoning the following are the winning bids: 2. Zelseus 100 @ 1.15m 2. Xulton 250 @ 1.15m 4. Ahn 100 @ 1.11m 4. Raskor 50 @ 1.11m 7. Kazuo 286 (of 400 bid) @ 1.10m 7. jna 357 (of 500 bid) @ 1.10m 7. Killer2 357 (of 500 bid) @ 1.10m The final settlement price is 1.10m per bond equating to a yield to maturity of 6.82% per month. If the winning bidders could transfer the following amounts of ISK to Polvek at their first convenience then I will send you the bond note. Zelseus 100 @ 1.10m = 110m ISK Xulton 250 @ 1.10m = 275m ISK Ahn 100 @ 1.10m = 110m ISK Raskor 50 @ 1.10m = 55m ISK Kazuo 286 (of 400 bid) @ 1.10m = 314.6m ISK jna 357 (of 500 bid) @ 1.10m = 392.7m ISK Killer2 357 (of 500 bid) @ 1.10m = 392.7m ISK Many thanks for the support. I'll do my utmost to deliver on ICHEM's promises. Updated financial statements for the last 2 weeks are being prepared and will be posted later. Regards Polvek
Polvek Tybor Imperial Chemical Industries	Posted - 2008.02.24 19:48:00 - [12] If some of the winners renege on their bids then I propose that the following actions be be taken: 1. Offer the untaken bonds to existing winners at the settlement price. 2. Offer them to unsuccessful bidders at the settlement price - first come first served. 3. If it's not too many then just don't issue those bonds at all. 4. Offer them to unsuccessful bidders at a lower price (and refund everyone else the difference). I hope this sounds reasonable. In this case the issue is over-subscribed by 400m bonds so it hopefully won't arise. Thanks for the bids Treelox. I hate to turn your money down (temporarily) but it's important for me to build the business (and investor trust) gradually. Hopefully I'll have room to expand and issues further bonds in due course and I'd be glad to take your cash.

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