Americas Structured Equity House

To see the full digital edition of the IFR Review of the Year, please <a href="http://edition.pagesuite-professional.co.uk//launch.aspx?eid=24f9e7f4-9d79-4e69-a475-1a3b43fb8580" onclick="window.open(this.href);return false;" onkeypress="window.open(this.href);return false;">click here</a>. The ability of Priceline, a notoriously shrewd company, to virtually name its own price on a US$1bn convertible bond in March was the type of iconic transaction that showed what was possible on terms and pricing. Against a backdrop of pent-up investor demand, the online travel broker managed to print a six-year unsecured CB with 50% a conversion premium paying a 1% coupon. The aggressive terms – the conversion premium represented the highest achieved by on a vanilla CB in the US since 2003 – provided a template for similar transactions, including a US$525m five-year, 2.25% CB by Tibco Software in April that boasted a 52.5% conversion premium and a US$250m CB by Toll Brothers priced at 0.50%, up 50%. “It was a watershed event for the convertible market this year,” said Bennett Schachter, a managing director in the Americas equity-linked origination group at sole bookrunner Goldman Sachs. “It broke the up 50% barrier that would facilitate similar deals for homebuilders as well as other sectors. We had a view that it was investment grade and that there was a shortage of paper in the market.” With ruthless efficiency, Goldman trumped the competition by agreeing to buy a US$875m CB at 1%, up 50%, with an agreement by the company to repurchase US$200m worth of stock alongside the transaction. To the dismay of rivals, the bank was able to finalise pricing at 99.5, the top of a 98.5–99.5 marketing range, and subsequently exercise its US$125m over-allotment option. Tellingly, the size of the share repurchase, designed to facilitate delta-hedging on the part of technical buyers, was decreased from US$200m to US$166m, reflecting the presence of long-only buyers in the bookbuild. Further evidence of outright participation was a 1.9% rise in the underlying stock the day after pricing of the overnight transaction. Priceline, rated BBB by S&P, had contemplated a convertible bond since its previous CB two years earlier, conducting a series of competitive auctions only to shy away due to the focus on achieving a premium share price. Arguably, the company benefited from a process that provided feedback on where investment banks stood at multiple stages and led to increasingly aggressive terms. “You have to give the guys at Goldman Sachs credit,” said one rival CB banker. “They absolutely nailed the terms.” Others were critical of the issuer given the lengthy gestation period of the transaction and all of the work undertaken in securing approvals for such a sizeable commitment. For Priceline the financing was truly opportunistic. The company sold a US$575m five-year CB in March 2010 and considered the possibility of a straight-debt placement, with pricing possible in the 4% range. The low-coupon, high-premium CB offered a similar profile, at lower all-in cash costs. Priceline accomplished a number of goals from a corporate finance perspective. Although the company had sufficient liquidity, after finishing 2011 with US$2.7bn of cash and short-term investments, US$1.7bn of that was “trapped” offshore due to the tax obligations associated with repatriation. The CB provided liquidity in both the domestic and foreign markets. Another accomplishment was the ability to lock-in the price of the repurchased stock, continuing its commitment to shareholders. The company purchasing stock at US$629.74, the reference, but dilution only kicking in above US$944.61 makes sense. That it was able to raise funds at an ultra-low rate of 1% is all the more impressive. The additional liquidity would come in handy. In November, the company agreed to acquire Kayak Software for US$1.8bn, continuing a legacy of acquisitions that has helped i

To see the full digital edition of the IFR Review of the Year, please <a href="http://edition.pagesuite-professional.co.uk//launch.aspx?eid=24f9e7f4-9d79-4e69-a475-1a3b43fb8580" onclick="window.open(this.href);return false;" onkeypress="window.open(this.href);return false;">click here</a>. After a stuttering start, the year ended strongly with the European equity-linked market running at a level of activity not seen in years. Volumes eventually overtook those of both the previous two IFR award years. Yet it was not plain sailing, with an active first quarter followed by a very quiet second. Several banks had to wait until after the summer for their first deal of 2012. Deutsche Bank’s year was different as a steady stream of deals ensured its team was constantly active. It earned a staggering 19.6% market share across 15 deals. “In a market where there are often four bookrunners as lenders are included, sole bookrunning positions are rare so building market share relies on printing a lot of deals,” said Keyvan Zolfaghari, head of equity-linked for EMEA at Deutsche. Volkswagen’s €2.5bn mandatory convertible bond is IFR’s EMEA Structured Equity Issue of the Year, while the other candidates were the US$3bn Siemens bonds plus warrants; the US$475m Severstal transaction that secured the top premium of the year at 45% (in effect, even higher due to premium redemption) and an extraordinary US$2.6bn of demand; and Nokia’s €750m CB, which combined its status as the largest vanilla convertible bond of the year with one of the worst equity stories in Europe. Deutsche Bank was a bookrunner on every one.It starts at home Germany was an important market with the jumbo US$3bn bond plus warrants from Siemens, the €2.5bn mandatory convertible bond from Volkswagen, adidas’ €500m CB, plus smaller deals from real estate firms TAG Immobilien and GSW Immobilien. Rivals argue the “German bank” was certain to capture a large portion of these deals. That’s true, but Deutsche was bookrunner on every one. Deutsche Bank did not lead its market, it completely dominated it. Though a traditionally strong equity-linked house in Europe, Deutsche dropped back in the late noughties. The last two years saw the bank end fifth then fourth in the league tables by volume. In the IFR award year to mid-November 2011 the bank led just four deals. Success in 2012 was driven by large deals on behalf of German issuers, but as multi-nationals with multiple banking relationships, none required a domestic bank. In January Siemens needed US dollars. But its accounts and listing are in euros, and one thing investors (and accountants) do not like is cross-currency bonds. The bond with warrants structure used in February allowed the company to raise US dollar funding but issue euro-denominated warrants. The solution was not perfect as investors found the bonds could not be delivered against the warrants and there has been little liquidity in the bonds. Yet by coming to market in February when investors were starved of investment-grade paper and printing at US$3bn, the largest corporate deal since the engineering business’s last visit in 2003, Siemens easily defied those imperfections. Deutsche was sole global co-ordinator and invited the other bookrunners to participate the night before launch. The lender was soon back with another issue on behalf of Siemens. Despite the jumbo transaction, the market was still starved of high-grade paper and bankers were aware that extra efforts were required to satisfy the investor base. Deutsche took this to a new level when Siemens wished to dispose of in-the-money warrants in technology company Draegerwerk. The easy trade was to simply sell the warrants or the converted equity in the market. Instead, having seen how ravenous investors were for Siemens’ product, Deutsche came up with a Bunds plus warrants structure to give the market some much-needed Triple A paper. Sourcing similarly dated Bunds, the

To see the full digital edition of the IFR Review of the Year, please <a href="http://edition.pagesuite-professional.co.uk//launch.aspx?eid=24f9e7f4-9d79-4e69-a475-1a3b43fb8580" onclick="window.open(this.href);return false;" onkeypress="window.open(this.href);return false;">click here</a>. When Volkswagen launched its €2.5bn mandatory convertible bond issue after market close on November 5, there had not been a similar deal in Europe for three years. Even then, Adecco raised just SFr900m (US$962m today), although the transaction also broke a 15-month drought. Such deals fell out of favour because a large chunk of their audience is hedge funds, whose strategy is to immediately place the delta when faced with a mandatory. That means that, suddenly, there is not one deal but two – the leads have to corral interest in the equity, typically totalling 75% or more of the bond issue, and this inevitably puts pressure on the share price. Yet, as the US market for similarly structured mandatories is dramatically different with an outright buyer base and no need for a delta placement, the combination of advice from banks and adviser Rothschild was deceptively simple: launch a 144a transaction into the US to soak up the outright demand. The logic was clear, but the unknown was whether US investors would buy. VW is a global name with production sites in every region of the globe, but the company has no US listing. US demand was crucial as the more hedge fund involvement, the larger the delta placement and the lower the chance of success. To complicate matters further, a VW equity offering was bound to be tough, with the stock up nearly 44% year to-date and some equity investors beginning to fret that the industry faced more headwinds in the near future. The planned use of proceeds was also vague. “If hedge funds know that the other holders aren’t just five like-minded funds but a long list of outrights then it changes their behaviour,” said Frank Heitmann, European head of equity-linked at Credit Suisse. “In the US, mandatories sold to outrights price about a coupon point tighter than Europe. VW priced somewhere between the two and then traded tighter.” The banks talked a good game so VW and Rothschild made them deliver with bookrunner roles awarded to Bank of America Merrill Lynch, Credit Suisse and Deutsche Bank following an auction based on the coupon and minimum pricing for the delta placing. Six banks had pitched ideas to VW and each was also asked for their placement strategy on the bonds and the delta. It was the adviser that pushed for the Monday night launch, fearing markets could trade off following the US presidential election the next day. It was a judicious move – and one banks holding risk were unlikely to make unprompted – as markets did just that as the fiscal cliff moved into focus. The plan worked with a bond book of just over 150 accounts and the deal increased to €2.5bn from a €2bn base. Pricing came at the best terms for investors with a coupon of 5.5%, but considering the auction this was not over-generous. Half of the demand came from the US, plus US$500m from VW shareholder Qatar Holding. Just 13.3% of the bonds were allocated to funds wanting to hedge the full delta, taking the equity placement to €618m – a hedge of 24.7% compared to the theoretical delta of 75%. But a funky product and strong demand is nothing if the accounting treatment isn’t right. Auditors are not familiar with the structure and Bayer, which was previously the benchmark transaction in Europe, found its mandatory treated as debt by its auditors. Bankers worked with VW’s auditors from the start and ensured €2.18bn of the proceeds was recognised as equity. It is the treatment of benchmark transactions that tend to determine subsequent auditor behaviour, so the deal not only has redefined the distribution and pricing of mandatories, but as importantly, whether it is worth companies issuing them.

To see the full digital edition of the IFR Review of the Year, please <a href="http://edition.pagesuite-professional.co.uk//launch.aspx?eid=24f9e7f4-9d79-4e69-a475-1a3b43fb8580" onclick="window.open(this.href);return false;" onkeypress="window.open(this.href);return false;">click here</a>. JP Morgan drew on its all-round strengths and pan-regional reach in 2012 to find opportunities even in a subdued year for primary equity-linked issuance. It completed deals for issuers from six countries and was active in a couple of successful restructurings, which was a major theme. Several of JP Morgan’s deals achieved notable firsts, such as a negative yield for Malaysian sovereign investment agency Khazanah’s exchangeable sukuk in March and the first call-spread overlay for an Asian issuer for travel agency Ctrip’s US$180m issue in September. The standout deal, though, came at the end of IFR’s awards period, as embattled consumer electronics giant Sony managed to tap the CB market led by JP Morgan as joint bookrunner with the largest economics.Make believe Hopes of Sony bringing a deal had initially looked slim, as the firm teetered on the brink of a downgrade to junk status, and its stock price had halved in the previous eight months. The Japanese electronics sector as a whole was battling with falling prices, and Sony’s CDS were trading at around 450bp prior to the deal launch, which should have meant it would need to offer around a 1% coupon – unheard of for a large Japanese issuer. An undisclosed major Japanese bank provided asset swaps for around 80% of the deal at 190bp, enabling Sony to print a ¥150bn (US$1.8bn) zero-coupon CB with a 10% conversion premium. This meant investors could sell the credit exposure, leaving them effectively with a warrant at a 10% premium. The asset swap boosted the bond floor significantly, to 90 from around 79 without. “Sony is a landmark deal on multiple fronts, raising close to US$2bn amid a volatile phase for the company,” said Aloke Gupte, the bank’s head of equity-linked origination, Asia-Pacific. “As lead-left bookrunner, we worked very closely with Sony to devise an optimal issuance structure and strategy to achieve their objectives – the oversubscribed order book and aftermarket trading demonstrates that the CB was well executed and well received.” The deal was the largest in Asia-Pacific since KDDI (IFR’s Asia-Pacific Structured Equity Issue of the Year) printed a ¥200bn CB in November 2011. Sony had not issued a convertible since its ¥250bn zero-coupon five-year issue matured in 2008. The deal drew ¥300bn of demand from around 80 accounts and narrowed the issuer’s CDS spread by around 15% the following day. Khazanah’s US$358m exchangeable sukuk in March, on which JP Morgan was joint bookrunner, was another notable transaction. The seven-year deal with an investor put at the end of year three priced at the tight end of guidance for a 30% exchange premium, zero-coupon and a yield of minus 0.25% – the first US dollar equity-linked deal in Asia to come at a negative yield since 2009. The sukuk issue exchanges into shares of Chinese department store operator Parkson Retail Group and was issued by vehicle Pulai Capital. The deal attracted more than US$1.5bn of demand from over 100 accounts. Defying expectations, it printed tighter than Singapore state investment holding company Temasek’s two-year EB three months earlier, despite Temasek’s Triple A rating. For Chinese travel services firm Ctrip the aim was to boost the company’s share price on the Nasdaq. Its shares had fallen by 58% between January 2011 and the launch of the deal in September, close to its five-year low, as investors reacted to a series of governance scandals at other US-listed Chinese companies. The sole bookrun US$180m five-year put-three CB came with a call-spread overlay, raising the effective conversion premium to 50% to limit dilution to shareholders. The note priced with a coupon an

To see the full digital edition of the IFR Review of the Year, please <a href="http://edition.pagesuite-professional.co.uk//launch.aspx?eid=24f9e7f4-9d79-4e69-a475-1a3b43fb8580" onclick="window.open(this.href);return false;" onkeypress="window.open(this.href);return false;">click here</a>. Japanese telecoms operator KDDI’s jumbo ¥200bn (US$2.6bn) four-year zero-coupon convertible bond was a rarity in Asia-Pacific equity-linked. Given the four-month lull in Japanese issuance any deal was remarkable, especially one that (until Sony’s ¥150bn CB in November) was more than twice the size of any other Asia-Pacific trade in the awards period. Even more amazingly, one rival not involved described the execution as “unbelievably perfect” despite the anguish of missing out on the largest sole bookrun Japanese CB in five years. “The deal was done in very difficult conditions when very few people expected a convertible bond issuance by KDDI,” said Yoshifumi Otsuka, managing director of ECM at sole bookrunner Daiwa Capital Markets. “Market participants were surprised but the offering was absorbed smoothly and paved the way for other issuers in Asia to come to the CB market afterwards.” The lack of other new issues and reasonable pricing ensured Daiwa found strong demand and ended with a book close to twice covered, two-thirds of which came from investors in Europe. “Market conditions in late November 2011, when the deal was launched were far from ideal,” said Takao Asaka, director of ECM at Daiwa. “All stock indices in Japan, the US and Europe had been sluggish because of the US credit downgrade and the flooding in Thailand. In particular, the Nikkei index hit a low for the year just before the KDDI deal was launched and investor sentiment in the credit market was weak because of the European situation.” Timing was essential, however, as the Euroyen deal was to finance the purchase of Tokyo Electric Power Co’s ¥186bn 8% stake in KDDI. The electricity utility was reeling from the liabilities resulting from the multiple meltdowns at the Fukushima Dai-ichi nuclear power station that followed the March 11 earthquake and tsunami and needed to monetise assets rapidly. With the threat of a block sale of such a large portion of its shares, “KDDI had to find the best possible way to minimise the impact on its existing shareholders and the markets and that is why KDDI chose to issue a CB to finance the share buyback”, said Asaka. News of the deal surprised the market. With ¥137bn of cash on its balance sheet at the end of March 2011, KDDI could have financed a share buyback without a major new fundraising. The funds raised were used to buy Tepco’s 357,541 shares, which at the time were worth about ¥186bn. Additional proceeds took the total buyback to 424,126 shares. The deal was launched off the ¥521,000 close on November 28 2011, with guidance of 5%–15% for the premium. Bonds were offered at 103 against a 100.5 issue price. The modest premium range reflected the high proceeds target, where the base deal was ¥190bn. Pricing came at 10% to give an initial conversion price of ¥573,100. At final pricing Daiwa gave an implied volatility of 19.27 and bond floor of 95.89. Outrights saw a low premium in a large company – a rare investment-grade issuer in Japan – with a growth story. Hedge funds saw a sensible price and the ready availability of cheap asset swap to hedge the credit. Around 20% of the deal was allocated to Asian accounts, 61% to Europe and 20% to US offshore accounts. Competitors had only compliments for the trade as it was not pre-sounded and traded flat at 103 in the aftermarket – all the more impressive as the lack of issuance meant earlier deals had struggled to find the sweet spot on pricing. The ¥10bn greenshoe was exercised before the end of the week. Mizuho, Morgan Stanley and Nomura were co-managers.