Equity-linked House
In a year rocked by global volatility, one house stood out for its consistent execution in Asia’s equity-linked capital markets. For its part in the market-defining deals of the year and its unblemished track record, JP Morgan is IFR Asia’s Equity-Linked House of the Year.
The combination of fierce competition and intense volatility is a recipe for disaster in the equity-linked capital ma.rkets, and this year’s treacherous markets threw up some of the most challenging conditions an underwriter could face. JP Morgan dodged the many potential pitfalls to emerge, once again, as the strongest house in Asia’s convertible bond markets, with flawless execution giving it a standing well apart from rivals.
Despite a slump in new-issue volumes in the second half of 2011, Asia’s equity-linked capital markets remained as competitive as ever. JP Morgan was a top performer throughout the review period, managing nine deals for a total of US$1.34bn and a 9.5% share of the Asia Pacific market, including Australasia, but excluding Japan, and China’s domestic A-share market. While that did not drive it top of the tables, or include the biggest deals of the year in the region, JP Morgan impressed with its flawless execution and five sole mandates – a rare feat in the ultra-competitive CB market.
“In a year when there was extreme market volatility and equity-linked volumes were shrinking compared to 2010, quality execution became very critical and the key differentiator among banks,” said Aloke Gupte, head of equity-linked capital markets for Asia at JP Morgan. “We worked for a diverse set of issuers on a variety of transactions, many of which were path-setting ones this year.”
The bank showed an uncanny ability to seize the right moment to launch in volatile conditions – often winning aggressive terms for its clients, despite difficult markets.
One case in point is its joint bookrunner role in South Korean steelmaker Posco’s sale of five-year bonds exchangeable into SK Telecom shares, launched at one of the last opportunities of the summer to clear the market. The zero-coupon, no-put guaranteed deal on August 4 caught a very short window between a positive results statement from SK Telecom and an equity-market collapse in US hours that same day, after which the new-issue market remained closed for months.
Posco’s offering was the first-ever zero coupon five-year equity-linked note in Korea. It was also seen as expensive because there was no upfront coupon and only a small back-end yield. This meant investors had to bet on bonds that had an expected premium of about 38%–39% in such difficult markets.
In the end, the book was comfortably covered, with Posco’s being a well known credit and SK Telecom’s strong financial results among the positive aspects. Despite the US collapse, the order book held together.
JP Morgan also featured in a number of innovative deals through the year, many of which provided transformational funding for the issuers involved.
Taiwanese conglomerate Tatung’s US$150m zero coupon, zero yield CB in March was a rare three-year bond with the backing of a letter-of-credit facility. JP Morgan provided the LC, essentially enabling the loss-making company to access the capital markets at a competitive cost of funding. The Taiwanese regulator stipulates that companies with three consecutive years of losses have to get a guarantee backing their deals if they want to tap the capital markets.
Tatung had been trying hard to boost its market profile and was keen to tap capital markets to show the extent of investors’ support for its business. However, few banks were willing to write an LC for a loss-making company unless they could syndicate that exposure to other lenders.
JP Morgan did exactly that, but it took time to achieve. Tatung had filed the CB plan with Taiwan’s regulator in January, but managed to execute the deal only on March 21. By this time, JP Morgan had secured commitments from a number of Taiwanese banks willing to each take portions of the LC exposure, while Tatung succeeded in selling bonds that carried JP Morgan’s far higher credit rating of Aa1/AA– (Moody’s/S&P).
That deal was also the first new issue out of Asia since the Japanese earthquake, but still found strong investor interest with a boost from the short tenor and the scarcity of such a high-rated deal from Asia ex-Japan.
JP Morgan was a sole bookrunner on state-owned Chinese holding company GDH’s US$250m five-year exchangeable bonds in June that paid a coupon of 3.0% and conversion premium of 30%. The EBs, issued at par, exchanged into existing shares of Hong Kong-listed subsidiary Guangdong Investment. The reference price was just four Hong Kong cents shy of Guangdong Investment’s 52-week high, while the conversion premium put the strike price close to the company’s all-time high.
Longest since 2007
The paper had a put option after three years, but with an unusually long non-conversion period, with investors only allowed to exchange their bonds for shares after two years. At the time, it was the longest non-conversion period for an Asian CB or EB since Tata Motors’ convertible alternative reference securities issued in 2007, which had a non-conversion period of four and a quarter years.
Hanjin Shipping’s US$150m five-year put three CB – also a sole JP Morgan trade – in July allowed the issuer to seize a small window of opportunity, following a decent rally in the underlying stock. The coupon/yield to maturity and conversion premium was set at investor friendly ends of 4% and 20%.
The bank also helped Tsinlien Group, a Tianjin municipal government-owned holding company, raise Rmb1.3bn (US$200m) via five-year put-three bonds exchangeable into shares of Hong Kong-listed Tianjin Development Holdings. The bonds, which settled in US dollars and had a guarantee from the municipal government, drew an overwhelming response from investors. This was the first EB in 2011 with the backing of a Chinese municipal government.
The EBs were offered with a coupon and yield of 1.0%–1.5%, while the conversion premium was shown in the 25%–35% range, but an order book of about US$1bn ensured the coupon/yield was set at 1.25% and conversion premium at 32% – one of the highest on any CB or EB issued in the region at the time.
There were other trades that showed JP Morgan’s ability to structure and execute outstanding transactions. Taiwanese touchpad-maker TPK Holding’s US$400m three-year CB in April, for example, carried the highest conversion premium for a bond that paid no coupon or yield since 2004. Unlike most Taiwanese CBs, the company was also not keen on backing the deal with asset swaps and had sent out a message on the day of bookbuilding that it wanted bookrunners JP Morgan and Nomura to allocate more to investors not requiring asset swaps.
The bookrunners had made asset swaps available for about 25% of the deal, but ended up providing swaps for less than 1%. With limited stock available for hedging, it meant that most of the investors in the deal essentially left their positions completely unhedged – a rare feature for Asian CBs.
The book was still covered 10 times and outright investors bought into two thirds of the deal, with the remainder going to hedge funds. Given the strong book position, the company could afford to set the conversion premium at the top of the range at 32%. The valuations were also very aggressive with the implied volatility around 35.5% versus a 100-day volatility in the low 40s.
