One man and his share
In a year when the gulf between supply and demand in structured equity grew ever wider, the need to find new issuers of convertibles to sate the appetite of investors was crucial. Borrowing against a major shareholding – and pitching this as a rival to margin loans – has created exactly that. One man and his shares can now issue an exchangeable bond.
An unknown and unrated holding company with a large stake as its single asset is not an easy sell. Amorim Energia was not the first to try out such a structure, but its €400m issue was comfortably the largest and most elegant.
Amorim had previously relied on margin loans as financing against the controlling 38.34% stake it had built in Portuguese oil and gas major Galp since 2005.
“It was not a natural candidate for a capital markets transaction,” said Bruno Magnouat, global head of equity-linked at Societe Generale.
Galp itself proved to be both a plus and minus. The company has high dividend visibility and low volatility – important considering the equity is also the credit. Equity-linked investors also knew the asset incredibly well, but that was a result of the near US$2bn of paper with Galp as the underlying already in the market. The structure would need to deal with the impact of saturation on pricing.
An overcollateralised exchangeable with a pledge resulted. Overcollateralisation of 2.6 times is near the top of the 2–2.65 times range seen across five issues in Europe to date but compared reasonably to margin loans. More importantly, it gave the issuer five-year money without margin calls.
Key to the success was the provision of an unofficial prospectus, put together after many hours by lawyers and joint bookrunners Bank of America Merrill Lynch and SG. The document was not required, but detailed Amorim’s financials, business, risk factors and terms and conditions of the bonds.
The result was a multiple times covered book with pricing at the best end of terms for the issuer on marketing of a 3.375%–4.125% coupon and a 25%–30% premium. A book of more than 200 lines comprised strong outright participation at 47% and a number of hedge funds utilising long-only strategies.
“It is a margin loan without the margin,” said Yacine Amor, head of EMEA equity-linked at BofA Merrill.
The lack of movement in the share price – losing just 0.6% on the day of issue – illustrated the desire to maintain upside exposure on the stock and the overall success of the May 2013 deal.
A 10% drop in Portuguese shares over the following month gave the deal an additional shine.
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