Equity-Linked House

IFR Asia Awards 2012
8 min read
Daniel Stanton

In a tough year for the equity-linked market, one bank consistently landed roles on the biggest trades and for a diverse range of issuers. For achieving the best outcomes for issuers and investors and for its role in driving innovation, Credit Suisse is IFR Asia’s Equity-linked House of the Year.

It was not an easy year to source equity-linked deals, but Credit Suisse managed not only to win many of the top mandates, but also to earn lucrative fees and break new ground. The Swiss bank was involved in three of Asia ex-Japan’s five largest equity-linked transactions during the period under review, with a diverse range of deals that took skill to win and execute.

“We finished at the top of the league table without padding our position with unprofitable transactions,” said Jim McDonnell, head of convertible bond origination for Asia Pacific at Credit Suisse.

Credit Suisse won the most hotly contested deals, including a sole mandate from heavily banked Temasek, executed perhaps the most successful CB liability-management exercise ever in Asia and completed the first equity swap in the challenging Vietnam market to facilitate the enlargement of a standout CB for Vingroup.

Most importantly, Credit Suisse’s execution was strong and consistent, qualities that kept its equity-linked clients happy throughout the year.

The bank’s achievements were all the more impressive in an extremely difficult year for Asia’s CB market. For much of the year, aversion to credit risk meant that only Asia’s blue-chip names had access to the equity-linked market, while a correction to the early 2012 rally in share prices across Asia left many reluctant to come to market, preferring to wait for stock prices to return to previous highs before tapping the convertible market.

In a year when CB redemptions outpaced new issuance and there were no primary deals in Asia above US$500m, equity-linked houses had to find new ways to originate deals – especially since the powerhouse of China was notably quiet in terms of issuance.

Credit Suisse managed to win a chunky sole mandate from the most unlikely of countries: Vietnam. Thanks to its earlier work for property developer Vingroup in 2009, when it issued the country’s first publicly offered US-dollar CB, Credit Suisse was able to fend off competition to help the issuer tap the markets again at a larger size.

Market sentiment was weak in March, after a run of CB deals that performed poorly in secondary. Still, Vingroup managed to get a deal away, even if the final size of US$185m, after an enlargement option was used in part, was smaller than its initial target of US$250m.

That it was disappointed at printing a US$185m deal in March, at a point in the year when most Asian deals needed to come with extensive credit support to succeed, was a mark of how far the issuer had come.

When markets picked up in the following months, Vingroup and Credit Suisse acted deftly, winning approval from Vietnam’s central bank to increase the size of a greenshoe and to extend the deadline to exercise it. That allowed, effectively, a retap of US$115m to take the total issue size to US$300m – hefty for a market like Vietnam.

With many investors already full on Vingroup risk, Credit Suisse put in place a concurrent equity swap to enable CB investors to hedge. This was the first in Vietnam and Credit Suisse structured the swap as a “price adjustment contract” to overcome regulatory objections to derivatives contracts. The transaction gave investors comfort to book the trade, helped Vingroup reach its funding target and was profitable for the bookrunner.

Vingroup’s five-year-put-two CB paid a coupon of 5.0% to give a yield to maturity of 7.0%, with a conversion premium of 10%.

At the other end of the spectrum, Credit Suisse had finished 2011 with a splashy sole-books trade for Triple A rated Temasek Holdings, Singapore’s state investment holding company. Coming two months after Temasek had printed an exchangeable into Standard Chartered shares, there was fierce competition to win the mandate. This meant banks needed to do their homework on Temasek’s share portfolio, numbering dozens of stocks.

Credit Suisse eventually came away with the sole mandate, bookrunning in December a S$500m (US$409m) two-year bond exchangeable into shares of Hong Kong-listed Li & Fung. The EB carried a zero-coupon, zero-yield, and achieved a conversion premium of 40.165%, the highest for an Asian issuer since 2003.

Liability management was also a theme throughout the year as issuers tried to extend their maturities to take advantage of lower bond yields.

Credit Suisse continued its long relationship with CapitaLand, South-East Asia’s largest property developer, when it launched a concurrent new CB and tender offer for one of its REITs, CapitaCommercial Trust (CCT).

It printed a S$175m five-year CB, increased from S$150m, for CCT, as joint bookrunner alongside JP Morgan. The deal was one of a minority of CBs to come without an investor put, helping the issuer to manage its maturities.

At the same time, Credit Suisse, as sole tender agent, launched an offer for CCT’s outstanding and illiquid 2013 CBs. Private bank clients held a large chunk of the bonds, making it challenging to reach out to so many investors. Credit Suisse launched a public tender offer and emphasised that non-participating investors risked having their bonds redeemed at the clean-up call price of 109.37% of face value, rather than the 111.3% available in the offer.

In updating the market a few days after launch to announce that S$90.25m of CBs had been tendered, including about S$50m that Credit Suisse had accumulated before launch, bondholders realised that the tender offer was close to the clean-up call threshold of S$109.75m, spurring more to go in. When CCT announced two days before the end of the offer that the threshold had been crossed, 35 more investors tendered their bonds.

In total, 85.9% of the outstanding bonds were tendered, making the exercise probably the most successful Asian CB tender offer ever, despite a premium of less than one cent over the price prior to launch.

The same week, Credit Suisse conducted the first concurrent CB and equity offering from a Hong Kong-listed company for around two years. As joint bookrunner with Deutsche Bank, it printed a Rmb1.14bn (US$183m) five-year CB with an investor put at the end of the third year for China Power International Development, as well as a HK$931m (US$120m) top-up share placement.

Tapping two distinct groups of investors simultaneously helped to create price tension, tightening pricing and maximising demand. The CB printed with a 2.75% coupon/yield and 20% conversion premium, both at the mid-point of guidance, and was 6.5x covered. The CB was enlarged in full, drawing a balanced mix of long-only and hedge fund investors, despite the stock’s low liquidity and lack of borrow available.

This was followed in September with a US$400m five-year-put-three offering for palm oil producer Golden Agri Resources – at the time, the largest new Asian CB of the year.

Credit Suisse has long had a dominant position in the Indonesian capital markets, and this helped win it a joint bookrunner role. Golden Agri is listed and headquartered in Singapore, but comes with Indonesian risk, since all its plantations are there.

The issuer took advantage of pent-up demand from equity-linked investors to print at a low yield of 2.5% and a conversion premium of 28%.

Plenty of Asian CBs issued this year fell in the aftermarket, but Credit Suisse’s deals performed respectably, achieving the best outcome for issuers without squeezing too tightly on pricing and burning investors. In one of the toughest years for equity-linked issuance, Credit Suisse leveraged client relationships to source deals and delivered some of the year’s biggest and most successful offerings.

To see the digital version of this report, please click here.