Equity-linked deal/South Korea Capital Markets Deal
In a year when plain vanilla was flavour of choice, one deal shone for its structure and execution. Lotte Shopping’s US$903m convertible bond was a win-win solution for issuer and investors, making it IFR Asia’s Equity-linked Deal and South Korea Capital Markets Deal of the Year.
The launch of a dual-tranche convertible bond for Lotte Shopping, late on June 15, took the equity-linked market by surprise. Global market volatility was spiking, while Lotte Shopping was asking for a deal split into US dollar-denominated and yen-denominated tranches – both at zero coupons and negative yields.
On the face of it, the five-year put-three deal looked impossible, given that it came against the backdrop of a depressed equity market. Concerns of a US recession and a Greek sovereign default were already high on the agenda.
It was also one of the first times a Korean issuer had used a negative-yield structure in recent years – following a pattern that had become commonplace in Taiwan – and the first CB from Asia ex-Japan to include a yen tranche of over three years. It also marked the lowest yield for any Korean issuer since 2003.
The US dollar tranche was shown with a base deal size of US$500m, while the yen tranche had a size of ¥16bn (US$200m). The term sheet also mentioned a “same-day upsize option” – another unusual feature in a market where issuers typically take about 15 days to decide if they wanted to increase the deal size, based on response.
The yield for the US tranche was shown in the negative 0.5%–0.0% area, while that for the yen tranche was negative 0.75% to negative 0.25%. The conversion premium was marketed at 23.8%–28.6% over the June 15 close of W525,000 (US$483.44).
The fact that the company was rated A3/A– (Moody’s/S&P) made a difference for CB buyers, as well as the fact that Lotte offered rare diversification away from the usual Korean steelmakers and technology companies.
It is the only rated name in Asia ex-Japan’s retail sector to issue a CB and a much larger company relative to Chinese peers in the CB market. Only two Korean CBs are outstanding in the G3 market, from SK Telecom and Hynix Semiconductor, adding to the scarcity value of an issue from that country.
The question, however, was whether or not markets would hold up amid the volatility.
“The US and European markets had fallen for six consecutive weeks in the run-up to launch week, but, with Lotte Shopping’s share price near its all-time high, we guided the client to stand prepared and tap the market as soon as a window surfaced on June 15,” said Sherwin Loh, director of equity-linked capital markets at Goldman Sachs. “The deal was launched and priced before markets sold off later in the day in the US.”
To comfort investors, leads Goldman Sachs and Nomura ensured the yen tranche, which, although it looked aggressive optically, was cheap enough to attract investor interest.
“The dual-tranche offering enabled Lotte Shopping to maximise the issue size, tap an alternate investor pool and diversify the funding base, consistent with its corporate finance objectives,” said Neeraj Hora, head of equity-linked at Nomura.
The terms were finally fixed at the investor-friendly ends and the book was comfortably oversubscribed, with bankers close to the deal claiming about 80% of the orders were spread across both tranches.
The yen tranche yielded a negative 0.25% and a 23.8% conversion premium while the US dollar tranche paid 0% and the same 23.8% premium.
Investors assumed a 175bp over Libor credit spread and a 1.5% stock-borrow cost, giving a bond floor for the yen tranche of 93 with implied volatility at 24.5%. The dollar tranche had a bond floor of 92 and a 26.6% implied volatility, based on a 35% historical number.
The leads then took the decision to double the size of the yen tranche to ¥32.5bn, while leaving the size of the US dollar portion unchanged at US$500m. The dollar tranche was at about 99.25–99.50 late on June 16, while the yen tranche quickly traded up to 100.0–100.5.