EQUITY-LINKED DEAL
China Unicom’s record-setting US$1.84bn deal in September proved that Asia’s equity-linked market could deliver size and competitive pricing to top-quality issuers. For showcasing the rising prominence of Asia’s equity-linked market and its smooth execution, China Unicom’s five-year put three CB is IFR Asia’s Equity-Linked Deal of the Year.
When China Unicom launched its CB on September 27, it took the market by surprise. The market had never seen such a big deal from a Chinese issuer. There was no wall-crossing prior to launch and the issuer was a completely new name for the equity-linked market. It was also a rare offshore equity-linked deal from a Chinese issuer.
Unicom had a clear objective. It had bought back about 899.75m shares in September 2009 at HK$11.105 from SK Telecom and wanted to realise extra value from them.
The CB, if fully converted, would translate into 900m new shares, and came with a conversion price of HK$15.85 – slightly above Unicom’s IPO level of HK$15.58, set back in June 2000. The CB also paid an upfront cash coupon to ensure that investor interest was strong enough to cover the US$1.8bn deal. The marketed coupon range was 0.5%–1.0%, while the conversion premium was marketed at 33%–38% over the HK$11.70 reference price – Unicom’s September 27 closing level.
The company – the second largest mobile operator in China – has a strong shareholder base, with about 72% of its shares owned by government-linked companies and about 8.4% held by Telefonica. Despite the daunting deal size, it was therefore bound to be greeted with enthusiasm by investors. The deal also fitted well into the broader theme of investors seeking exposure to Asian companies likely to benefit from a huge rise in retail consumption.
International demand for emerging-market exposure drove Asian stock indices to new highs in 2010 and helped primary deals to sell faster than during the recession years. For a deal to be successful, however, bankers needed to show that the underlying business was likely to benefit from rising retail consumption and regional economic growth.
The books for the deal, CICC, Goldman Sachs and Nomura, were thus confident enough that they did not soft sound the deal before launch. There was an accelerated bookbuilding lasting only 2.5 hours.
At the marketed terms, the bonds had a high bond floor of 93–96 and implied volatility in the high teens to mid 20s, making the deal attractive against the stock’s historical volatility in the low 30s. If fully converted, the 900m new shares would represent 3.6% of Unicom’s enlarged share capital.
The leads generated enough momentum to be able to tighten the terms. The final pricing was at the mid-point of the marketed ranges. The coupon was set at 0.75%, which was enough to persuade investors to take on the bonds with a conversion premium of 35.5%, giving a price of HK$15.85. In short, investors got a good deal, and the issuer met its objectives.
“The completion of the bond financing will provide an even stronger capital support for the company’s rapid growth,” said Xiaobing Chang, chairman of China Unicom.
Over 150 accounts participated, comprising a number of hedge funds, CB outrights, private banks, equity and fixed income investors, accounting for about US$5bn of demand. The hedge funds were attracted by the equity portion of the CB which was easily hedgeable due to the high turnover in Unicom shares, and the upfront coupon. A lack of telecom issues in the Asian convertible market – especially from a company with a market cap of HK$275bn – added to the appeal.
In the final book, outrights took 35% of the deal, hedge funds 50%, private and equity and fixed-income investors bought the balance. By region, about 30% was placed with European investors, 55% with Asian buyers and 15% with others.
The CB ended up as the largest in Asia ex-Japan in 2010, achieving the lowest yield by any Asia-listed Chinese issuer since 2003. Unicom also got the highest conversion premium for any Asia-listed Chinese issuer since 2006.
Some observers criticised the company for giving too much away to ensure the deal got done, but the performance of the bonds post pricing showed the leads had set the terms about right. The bonds traded around 101.25–101.75 and, although the stock fell 4.2% the day after pricing, it recovered to about HK$11.40 on September 29. The leads had accounted for a 5% stock slippage post-issue and, with that, the implied volatility was still in the low 20s and the bond floor about 95 on a 150bp over Libor credit.
Proceeds will be used for 3G and broadband network construction and to replenish China Unicom’s working capital to support business development.
Shankar Ramakrishnan