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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.
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 and yield of 0.5% and conversion premium of 10%.
Alongside the CB, Ctrip bought back around US$40m of stock – the first time an issuer from Asia-Pacific had funded a share repurchase transaction with a CB. Management participation boosted investor confidence. The final size included US$20m from an overallotment option, and the following day the company’s share price jumped 6%, showing that the structure had achieved its objective.
Taking out the old
Restructuring remains an important part of banks’ role in the Asia-Pacific equity-linked market. “We successfully led two restructurings – a key element of the CB market in 2012 as investors and issuers grappled to manage the highest redemption levels ever seen in Asia,” said Gupte, who is assisted by Gaurav Maria.
China Nickel Resources Holdings had HK$1.33bn (US$172m) – roughly equal to its market capitalisation – in principal amount of CBs falling due in December 2012, but only around US$18m of cash on hand. Refinancing the bond entirely with a new CB would have heavily diluted shareholders and still involved a large bullet repayment at the end, but the company also did not want to inflict heavy haircuts on bondholders.
JP Morgan’s solution was to restructure the 10% bond through a voluntary exchange offer and consent solicitation to extend the maturity date, among other terms.
Under the exchange offer, for each HK$100,000 in principal of existing notes tendered, bondholders received new senior high-yield bonds with a principal amount of HK$75,000 and new CBs with a principal amount of HK$25,000, both secured. The company also agreed to pay accrued value – equivalent to 31% of face value – on the existing bonds in cash on the scheduled maturity date.
The new amortising senior bonds due March 2015 pay a coupon of 10% and will be redeemed in quarterly instalments beginning March 2013. The new CBs pay a 6% coupon with a revised premium of 25%. Almost 98% of bondholders approved the amendments.
The restructuring for Lion Diversified Holdings in Malaysia saw the maturity of its US$68.3m bonds extended by two years and maturity at par, rather than at 106.4173%.
Bondholders received the accreted value as a cash payment on the original maturity date. As an incentive, the price at which the bonds can be exchanged into shares of Parkson Holdings will be lowered at six-month intervals, and it will redeem chunks of the bonds before the extended maturity date in four instalments totalling US$20.6m. This greatly increased the chances of conversion.
In Taiwan, JP Morgan was a joint bookrunner on the US$466m concurrent CB and GDR issue of touch-screen technology producer TPK Holdings – the first such combo from that market since 2006 and the largest in Asia since April 2011.
Launching the two offerings concurrently limited dilution to shareholders and created price tension between the two tranches, enabling TPK to achieve a zero-coupon. The five-year put-three CB was launched at a size of US$200m and later increased to US$230m.
A US$254.4m issue from Cathay Financial Holdings in Taiwan as sole bookrunner, and joint books on CapitaCommercial Trust’s S$170m (US$139m) offering, showed the bank’s broad geographical reach.
Cathay’s two-year zero-coupon drew a book of over US$1bn and orders from around 80 accounts. It broke a two-month drought in the Asian CB market and, like the TPK trade, almost no asset swap was provided.
The diversity of deals under its belt this year showed JP Morgan’s geographical reach and its ability to find a solution for any challenge.