Equity-Linked Deal

IFR Asia Awards 2012
4 min read
Daniel Stanton

Asia’s largest global convertible bond of the year was also its most innovative, coming with a punchy premium and a unique clause to fund an overseas acquisition. For making its debut in style, Hong Kong Exchanges and Clearing wins IFR Asia’s Equity-Linked Deal of the Year.

Equity-Linked Deal 2012

In a year when convertible bond issuers generally played it safe and sizable issues were few and far between, Hong Kong Exchanges and Clearing surprised the market with a deal that ended up being the largest primary issue in Asia ex-Japan in the period under review.

After announcing on June 15 that it had entered into an agreement with the London Metal Exchange for a cash acquisition of £1.388bn (US$2.210bn), analysts had expected HKEx to resort to a rights issue for funding. HKEx instead caught investors off-guard with the launch late on September 24 of a US$400m five-year convertible bond that was covered within 30 minutes and soon increased in full to US$500m after being multiple times subscribed.

Investors were drawn to the quality of the credit and to the issuer’s highly liquid underlying stock, which was cheap to hedge. HKEx also took advantage of an investor base that had been starved of new convertible paper – redemptions having outpaced primary issues in Asia for the year – putting blue-chip issuers in a commanding position.

Besides being the biggest primary CB of the year, the deal also offered aggressive terms. The CB did not come with an investor put at the end of the third year – again a departure from the Asian standard – and it achieved one of the year’s highest conversion premiums at 34.57%. The premium, set from a range of 30%–37.5%, was the highest on an Asian CB since May 2011.

It priced with a 0.5% coupon and yield-to-maturity of 1.0%, in contrast to the 5% coupon sources said it would have had to pay for a hybrid issuance. In printing a CB, the HKEx also limited potential dilution to shareholders, compared with funding the full cost of the LME acquisition through a rights offer. The conversion price exceeded the stock’s 52-week high.

The issue had rarity value as the first CB from an exchange operator and marked the first time an Asian CB included a call option related to a merger. In an innovative feature, the bond’s terms allow the issuer to call the paper at 101% of accreted value if the HKEx fails to complete the acquisition within six months of issuance.

HKEx had never tapped the bond market or issued new equity since listing in 2000, so it was a bold move to head straight to the equity-linked market.

With a credit spread of 150bp, 23% volatility and 50bp stock-borrow cost, the bond floor was 93.8. It was quoted the following day at around 100.25 and continued to trade above its issue price. The stock closed down 2.6%, within expectations of 3.0% stock slippage.

The issuer’s timing was impeccable, even if it cost bookrunners some sleep. The week of the CB’s launch was more or less HKEx’s last chance to issue before entering a blackout period ahead of its results in November, given a forthcoming public holiday in Hong Kong. It turned out to be the last internationally offered CB from Asia ex-Japan before the end of the awards period.

Market conditions had been weak earlier in the day, but, when things picked up late in the evening, it was decided to go ahead with the deal, which launched after 9pm Hong Kong time.

More than 80 accounts participated and the deal was multiple times oversubscribed, with allocations concentrated towards the top of the book. Demand was skewed slightly towards Asia, with a strong bid from Europe and some US participation. A mix of outrights and hedge funds took part, despite outright investors’ usual aversion to anything with a conversion premium higher than 30%.

Deutsche Bank, HSBC and UBS were joint global co-ordinators and bookrunners.

HKEx’s acquisition of LME was granted approval by the UK’s Financial Services Authority in late November.

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

Equity-Linked Deal 2012