Monday, 23 July 2018

Steeling ahead

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The European convertible bond market came to a gradual halt in 2008. By March 2009 it had been six months since any deal, and even longer since the last fully marketed offer, yet ArcelorMittal dipped its toe in the market with a US$1bn CB issue. Within a month the total proceeds from convertible issuance was US$2.5bn. Owen Wild reports.

In March ArcelorMittal was one of many large cap companies subject to the microscope of analysts concerned about its financing position. Metal and mining companies were under particular scrutiny. In February the company had denied rumours that it intended to sell its Brazilian assets. Then it issued results showing a net loss, production cuts in Q1 and a target to reduce net debt by US$10bn.

By mid-March the rumour mill turned to the prospect of a rights issue. One paper erroneously claimed to have the terms on which new stock would be issued and the banks underwriting. Despite denials from the company, the market expected a rights issue was imminent.

The stock reacted accordingly. But a week later, ArcelorMittal launched a €750m convertible bond. The move came as a complete surprise: the European convertible market had been dead for over six months. Yet almost immediately it became apparent that the deal would price, even if equity-linked specialists had been sceptical prior to launch.

The day before, senior bankers running CB teams at two major firms both expressed doubt that the market would reopen in the near term. The conditions were right and appetite was there, but issuers were wary and demand was hard to gauge. After the collapse of so many funds in late 2008, issuers and bankers were concerned about leaping into what appeared to be a pool, but might turn out to be a puddle.

This concern underestimated the change in attitude to equity issuance and convertibles among both issuers and investors. When hedge funds dominated demand, CBs were not about the likelihood of conversion but the value of the option. But this started to change as hedge funds retreated and the investor base broadened. Fixed income funds and straight equity investors appeared in the secondary market with a different perspective.

For issuers in 2009, the stigma of issuing equity rather than turbo-charging returns with debt began to dissipate. It became possible to issue bonds with a very good chance of conversion and save substantially on the interest cost. ArcelorMittal proved this categorically. It ended up, following upsizing and a greenshoe, raising €1.25bn over five years at a cost of 7.25%. Its stock then rose as a rights issue became less likely and financing more secure. A 7.6% gain on the day was unprecedented, countering any shorting activity from buyers of the bonds and the potential dilution.

One hedge fund investor described this – and other metal and mining convertibles issued in 2009 – as extremely attractive. Over five years the stocks could even treble, he said, so the premium of 32% in this case was appealing. The book of demand collected by Calyon and SG totalled €7.5bn from 300 accounts. Issuing under the French OCEANE structure helped the lead banks attract strong outright demand which made up 68% of the book and meant French accounts received the most bonds.

The success of the convertible bond offering proved investors were right to believe in the equity recovery – the five-year paper was in-the-money in just three weeks.

The steelmaker had provided itself with some room to breathe by extending its debt maturity with the convertible issue. But it still needed equity to avoid breaching covenants. Once the bonds were in-the-money the company moved quickly, heading to the US with an equity and equity-linked deal priced off the New York-listed stock after removing the lock-up. Included in the US$4bn fundraising was another convertible of US$800m, this time convertible into US stock.

The terms seen on the second convertible reflected the progress made by the company in the intervening period, and the impact of the US$3.2bn equity placing. The coupon was set at 5%, 225bp lower in one month, while the premium was again 32%.

ArcelorMittal had completed an active year the same way it started: a simple, well-executed trade coming at just the right time. In May 2008 the company had raised US$3bn through a debut US dollar trade with both five and 10-year tenors. Those bonds were issued on the back of first quarter results that still showed a positive outlook for steel, away from the US, and attracted a US$7bn book of demand.

Both the tenors came at 235bp over Treasuries, against CDS of 200bp equivalent. The good timing was underlined by market malaise the following day seeing the quote drift to 239bp-237bp.

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