In search of green shoots

Asian Issuers: Building blocks for the future Source: REUTERS/Soe Zeya Tun People work at a brick kiln near Hlawga Village, 35km north of Yangon. As Asia’s capital markets hurtle towards the end of another busy year, signs of the region’s maturity are becoming clearer. Deal volumes are up, as rising equity valuations and low borrowing costs lure more issuers into the financing markets. More importantly, the range of products is also growing as Asia’s markets become deeper and more sophisticated. This year’s Asian Issuers Special Report showcases a group of issuers that have each completed landmark financings in recent months, whether they are seizing an attractive funding opportunity or pioneering a new asset class. Taken together, the deals and companies showcased in these pages point to the tremendous development in Asia’s capital markets in recent years, painting an encouraging picture for the region’s future. Asia’s international debt capital markets have welcomed several new products this year, including Green bonds and bank capital securities, while efforts to develop one of the region’s major local currency bond markets began to pay off in Australia with the arrival of more corporate and high-yield borrowers. Taiwan’s Advanced Semiconductor Engineering became Asia’s first corporate issuer to announce a Green bond, also in July, raising US$300m of three-year money to reinforce its environmental credentials and pioneer the development of the new asset class. China Citic Bank’s Hong Kong subsidiary launched Asia’s first Basel III-compliant Additional Tier 1 offering in US dollars in March, a crucial step towards the creation of a big new market with billions of dollars of Chinese bank capital already in the pipeline. G8 Education returned to Australia’s underdeveloped high-yield bond market in March, before taking its story to Singapore in May and August, tapping high-net-worth investors in both markets and helping to deepen the region’s cross-border financing links. National borders continue to come down, with Japan’s notoriously conservative fixed-income investors opening up to Asian issuers, the Chinese renminbi enjoying greater regional demand and several overseas borrowers turning to Singapore. Malaysia’s biggest bank broadened its funding horizons this year with a pair of landmark issues in Japan’s fledgling Pro-Bond market. Maybank was also instrumental in opening the country’s local market for Basel III-compliant bank capital with Malaysia’s first Additional Tier 1 in September. Political change proved no match for global credit bulls, and Thailand’s PTTEP showed it would take more than a military coup to dent confidence in one of the country’s premier corporate credits in June with a rare hybrid that arrived only weeks after the army seized power. Pakistan returned to the global markets in April with its first sovereign bond in seven years, locking in US$2bn of essential funding in a surprisingly popular deal that paved the way for state equity divestments. While high-grade bonds are undoubtedly becoming more commoditised, the growing global acceptance is also edging Asia’s frequent issuers towards developed-market status, bringing down borrowing costs for the region’s top companies. The equity capital markets have developed, too, even if Asia’s biggest issuer of the year had to turn to a US exchange to complete its listing. The months-long frenzy surrounding Alibaba’s record IPO allowed a string of other Asian technology companies to tap into surging demand for the sector, while the pipeline elsewhere is building again following political upheaval across much of South and South-East Asia. Singapore’s biggest IPO of 2014 so far has come from an unlikely sector, with Accordia Golf completing a US$600m business trust listing in July. As well as the unique golf angle, the deal cemented links between Japanese issuers and South-East Asia’s capital markets following last year’s Singapore debut of Croesus Retail Trust. Q

Teeing off first Source: REUTERS/Toru Hanai Ai Miyazato of Japan watches her tee shot on the first hole during the first round of the Mizuno Classic LPGA Official Tournament at the Seta Golf Course in Otsu, western Japan. Accordia Golf Trust raised S$759m (US$600m) from Asia’s first golf business trust IPO in July, in the process overcoming doubts over the profitability of the Japanese golfing sector. With Singapore’s deeper business trust market, in terms of investors and listings, it came as no surprise that Accordia chose the city state over Hong Kong for the listing. The IPO also remains Singapore’s largest for 2014. Goldman Sachs set up Accordia, Japan’s largest golf course operator, in 2003 to manage the close-to-bankruptcy and financially weak courses it acquired in the 1990s. In 2011, Goldman Sachs sold its 44.73% stake in Accordia through an offering of secondary shares. Accordia formed the business trust as part of an “asset-light strategy”. While the assets will be transferred to the business trust, the company will keep receiving management and trustee fees. CEO Yoshihiko Machida said Accordia did not want to spin off the assets through the Japan real estate investment trust (J-REIT) structure because, under the related rules, the company required the permission of all landowners where the assets were located. However, under the business trust structure, this requirement is not there. “We were willing to pay the premium of a business trust because of the convenience of the structure and also because Accordia needs to be asset-light,” Machida said. Spinning off the assets into a business trust also allows Accordia to benefit from lower taxes. Full ownership of the assets will result in a Japanese corporate tax rate of 37.1%. Instead, economic ownership through a special-purpose vehicle, known in Japan as a “tokumai kumiai” structure, reduces it to a 20.4% withholding tax on distributions. Typically, the yield on J-REITs is 3.5%–4.5%, while that on business trusts in Singapore is between 6% and 9%. Croesus Retail Trust was the last Japanese company to embark on a Singapore business trust IPO in May 2013. The S$365m IPO was priced to yield 8%. Marketing of the Accordia IPO started in May, and the targeted investors were those in Asia and Europe. “At the marketing stage, our greatest challenge was to clear the investor misunderstanding that the golf business is not profitable in Japan. All our golf courses are profitable.” Machida said, while pointing out that all of Accordia’s golf courses are in Tier 1 cities. “Another challenge was that, with Accordia being a listed company, we couldn’t make many disclosures to the global investors, who weren’t fully aware about the sector,” Machida said. “At the marketing stage, our greatest challenge was to clear the investor misunderstanding that the golf business is not profitable in Japan. All our golf courses are profitable. Another challenge was that, with Accordia being a listed company, we couldn’t make many disclosures to the global investors, who weren’t fully aware about the sector.” As a result, Accordia sold nearly 90% of the units made available to Japanese investors under the public offering without listing (POWL) scheme. This is much higher than the 10% typically allocated to Japanese investors in Asian POWLs. The trust sold 782m shares at the bottom of the S$0.97–$1.00 range, implying a 2015 yield of 6.8%–7.0%. The IPO comprised an institutional portion of 164.6m shares, a Singapore retail portion of 41.1m and around 576.2m shares for Japanese investors. As the response from Japanese investors was stronger than anticipated, the tranches were reallocated and they were allocated 705m shares, while Singapore investors were assigned 28.8m shares as the tranche was 0.7 times subscribed. The rest of the shares were sold to institutions. Around 40 investors participated in the institutional tranche, equally divided among Asian, European and offshore accounts. Accordia’s f

Test case Source: REUTERS/Bobby Yip Rice saplings are seen in test tubes at the Beijing Genomics Institute in Shenzhen, southern China. Introducing the concept of loss-absorbing Tier 1 capital to Asia was never going to be straightforward, but Citic Bank International, a Hong Kong subsidiary of China Citic Bank, was determined to be the first to do so. Before Citic’s US$300m deal in March, no Asian bank had braved the US dollar market with an offering of Basel III-compliant Additional Tier 1 capital, setting the scene for an important test of investors’ appetite – both for the issuer and the format. As per Basel III requirements, the AT1 bonds will be permanently written, in part or in full, if the Hong Kong Monetary Authority deems Citic Bank International to be no longer viable – an event that carries no numerical trigger. The perpetual notes are callable with a rate reset after five years, but carry no step up in coupon. Coupon payments are non-cumulative and may also be stopped if the bank runs into trouble. That structure matched Hong Kong’s interpretation of Basel III requirements, but earned Citic a relatively low Ba3 rating from Moody’s – four notches below Citic Bank International’s standalone rating of Baa2 from Moody’s and BBB from Fitch. While the global standard for AT1 requires a three-notch penalty, the rating agency deducted an additional point for the uncertainty over SAR’s interpretation of non-viability, noting that the Hong Kong Monetary Authority has not defined the point at which a bank becomes non-viable. Joint global co-ordinators Citigroup, HSBC and RBS marketed the deal alongside bookrunners ANZ, BBVA and CLSA (now a Citic Group company). “The HKMA is relatively savvy about adopting new capital market instruments, including Basel III-qualifying securities.” To compensate for the additional risks, as well as for the uncertainties attached to any new product, the bookrunners began collecting orders at a relatively high yield of 7.75%. That offered about 200bp over China Citic’s outstanding 6% Tier 2 bonds, which rank higher in the capital structure and come with no contractual loss-absorption clauses, since they were issued under Basel II rules. Investors flocked to the deal, with orders climbing north of US$5.7bn from 260 accounts, and allowing Citic to pull the yield tighter to price at 562.7bp over US Treasuries, an all-in yield of 7.25%. That price already showed that Asian banks could price inside their European peers on a relative value basis, since European AT1s typically offer around 200bp over T2 bonds. Citic’s AT1s jumped two points in the secondary market on their first day of trading, pushing the yield to 6.78%, and have continued to climb since launch as more investors warm to the format, touching 105 in early August for a yield of 6%. Chong Hing Bank, which operates in Hong Kong, but is under the control of the Guangdong government’s Yuexiu Enterprises, priced its own US$300m AT1 issue in September at a yield of 6.5%, following a very similar format to Citic. Chong Hing’s notes received a Ba2 Moody’s rating, three notches below its senior score and one above Citic’s securities. The next big test will come from two of China’s largest state-owned banks, which are preparing to market offshore deals, where China’s banking regulator – not the HKMA – will decide on the point of non-viability. Bank of China and Industrial and Commercial Bank of China are looking to sell a combined US$12.2bn of Basel III-compliant AT1 preferred shares overseas, with the first deal slated for next month. Citic’s AT1 does not include a mainland China trigger and qualifies only as capital in Hong Kong. “The HKMA is relatively savvy about adopting new capital market instruments, including Basel III-qualifying securities. The adoption takes longer in domestic China, which needs approval from both the securities and banking regulators,” said a banker close to the Citic trade. “That’s why the Hong Kong subsidiary went ah

Eager to learn Source: REUTERS/Adrees Latif Liam Tucker, Rhys Tucker, Rory Eagle and Harry Longworth (L-R) conquer a sculpture at the ‘Sculpture By the Sea’ exhibit in Bondi Beach, Australia. Australia’s under-developed high-yield bond market keeps expanding at a steady pace with almost A$1.3bn (US$1.16bn) raised at home during the last two years as more new entrants print debut deals. However, while other high-yield issuers have sold just one local bond each, Australasian childcare centre operator G8 Education has launched more, innovative transactions this year. The unrated ASX-listed company made its debut in the domestic high-yield market in August 2013 with a A$70m 7.65% six-year bond that was the biggest domestic high-yield bond targeted at private investors until 360 Capital’s A$75m issue 13 months later. G8 returned in March this year with Australia’s inaugural floating-rate note from a non-investment-grade issuer. The A$50m four-year piece priced to yield 390bp over 90-day bank bills. As with most high-yield deals, FIIG Securities, Australia’s largest specialist fixed-income broker, arranged G8’s two local transactions. Both had minimum investment sizes of A$50,000 rather than the typical A$500,000 required in the institutional market. Such deals target high-net-worth individuals and self-managed superannuation funds, although some small asset managers have also participated in these offerings. Australia has the world’s fourth-largest pension pool, with total assets of almost US$1.6trn, or 105% of the country’s GDP, according to the 2014 Towers Watson global pension assets study. Nearly a third of this pool comprises self-managed superannuation funds. However, only 13% of Australia’s pension pool was allocated to bonds last year. That is less than half the global average of 29%, which leaves plenty of scope for a reallocation away from the dominant equity sector. Mark Paton, managing director and CEO at FIIG Securities, said G8’s two domestic bond issues attracted over 1,000 primarily buy and hold investors, underlining the strong appetite for the sector and the issuer. Two months after its local FRN, G8 Education made its first visit to the Singapore dollar bond market with a three-year bond issued off a S$500m multi-currency MTN programme. The S$175m (US$139m) offering priced at par to yield 375.4bp over the Singapore dollar swap offered rate, or 4.75%. DBS was sole lead. The offering was increased from an initial target of S$100m as the Australian issuer appeared to choose size over price, having hoped to pay a yield closer to 4.5%. Nevertheless, G8 can be pleased with drawing a book of S$650m from 47 investors and pricing inside its outstanding Australian dollar bonds. At the time, G8’s 2018 Australian dollar bonds would have swapped into Singapore dollars at high 4% to 5% range, meaning the deal did not include any new-issue concession. Although private banks bought 75% of the deal, a respectable 25% went to fund managers, banks and others. Singapore investors bought 84%, while Hong Kong and others bought 16%. On August 14, G8 Education tapped the bond for S$85m to lift the total amount of outstanding 2017 bonds to S$260m. DBS, which also arranged the reopening, attributed the increase to reverse enquiry. “G8 initially tapped the domestic Australian market with two unrated issues, one fixed and one floating, establishing their credentials as a sound issuer. They were then able to leverage off this by establishing a Singapore dollar programme to align some of their funding needs for their Singapore assets,” Paton said. “As a listed company, G8 now has four diverse sources of funding, from equity and bank debt to the domestic and international bond markets.” Since the first FIIG-led high yield bond in September 2012, eight domestic companies have raised a combined A$475m, with only G8 being a repeat issuer. New Zealand’s CBL Corp became the first Kangaroo corporate high-yield issuer in April with a FIIG-arranged A$

Wider horizons Source: Reuters A Malaysian takes a souvenir picture of the Petronas Twin Towers in Kuala Lumpur. Malayan Banking, better known as Maybank, has emerged as one of South-East Asia’s most innovative issuers this year, venturing into new markets and introducing fresh products to its home investor base. Armed with its stable A3/A–/A– rating, the usually conservative Maybank twice took advantage of a new opportunity to issue debt in Japan, where the central bank’s monetary stimulus has squeezed domestic yields and increased the yen’s appeal to foreign borrowers. It also helped open the Malaysian market for Basel III-compliant paper, with Asia’s first fully marketed Tier 2 sukuk under the new rules arriving at the end of March, and the country’s first Basel III Additional Tier 1 offering in mid-September. “The bank has changed the way it looks at capital and liabilities and, this year, we decided to test our name in the market,” said Odie Lee, group corporate treasurer at Maybank. “We wanted to put ourselves in the spotlight and diversify our investor base.” Maybank’s first outing in Japan’s Pro-Bond market in May brought in ¥31.3bn (US$307m) of three-year funds, using the lender’s existing US$5bn medium-term note programme to target professional Japanese investors. Unlike Samurai bonds, which allow foreign borrowers to target a broader local investor base, but require them to submit documents in Japanese, Pro-Bond issuers can use English documentation, cutting the time it takes to put a deal together and lowering transaction costs. A firm that sells a Pro-Bond in Japan only needs to file an annual disclosure statement rather than the mandatory semi-annual statements required of Samurai issuers. Legal fees are also lower for Pro-Bond issues. After a slow start, with only Dutch bank ING taking advantage of the format before this year, Japan is redoubling its efforts to develop the market. Last December, the state-backed Development Bank of Japan announced it would buy ¥100bn of Pro-Bonds, doing its part to attract more foreign companies to sell debt in Japan. The Bank of Japan’s quantitative-easing purchases are forcing other investors out of the Japanese Government bond market. Besides Maybank, Banco Santander Chile has also taken advantage of the additional demand, and bankers say more deals are in the works. “Maybank has a market cap of over US$25bn and is a very sophisticated issuer. It was an ideal candidate to kick-start the market,” said Benjamin Lamberg, global co-head of MTNs and head of Asian syndicate at Credit Agricole CIB, which arranged the debut offering alongside Maybank Kim Eng Securities. “After the success of the first deal, we found there was demand for a more public, syndicated issue to take the tenor out to five years, and get more granular with second-tier and third-tier domestic accounts. The Pro-Bond market is definitely getting some momentum.” “There is still some work to be done with investors establishing limits, but the Pro-Bond format is a lot easier than a full-fledged Samurai for an issuer not familiar with Japanese law.” The Samurai market remains far larger, with deals in the first month of this Japanese fiscal year alone already surpassing the total size of the Pro-Bond market. Maybank, however, has proven that the concept can work for Asian issuers. “We decided to look at private placements to target some active investors, and Japan was an obvious choice as investors there really understand the Asian market,” said Lee at Maybank. “There is still some work to be done with investors establishing limits, but the Pro-Bond format is a lot easier than a full-fledged Samurai for an issuer not familiar with Japanese law.” Basel benchmarks While the Japanese financings appeared opportunistic, Maybank’s Basel-compliant issues set an important benchmark for others to follow. Moody’s estimates that Malaysian banks will need to issue another M$2.5bn of capital securities come 2016 to maintain curr

The next frontier Source: REUTERS/Damir Sagolj Supporters of Nawaz Sharif’s Pakistan Muslim League - Nawaz (PML-N) dismantle a huge tent at one of party’s election headquarters in Lahore. The Islamic Republic of Pakistan has a lot to offer investors as long as they have a measure of risk tolerance. The sovereign’s first bond in seven years drew a lot of demand in April, support that is likely to be repeated in another rare buying opportunity – a sukuk offering, Pakistan’s second in the format, expected later this year. For equity investors, too, the government’s ambitious privatisation plan should provide some chances to own stakes in the country’s better-performing companies. Yet, debt and equity investors are going to have to pay close attention to how well the country of 180m, under reform-minded Prime Minister Nawaz Sharif, maintains stability against recently escalating political opposition. Protracted volatility would likely affect leaders’ ability to implement the reform platform the International Monetary Fund endorsed last year under the Extended Fund Facility. The three-year US$6.64bn aid package went into effect months after Pakistan elected Sharif to office in May. “[A]ny loss of reform momentum could see the external support, on which the country depends, dwindle, straining its capacity to repay its debts,” said Anushka Shah, an analyst in the sovereign risk group at Moody’s, in an email. “From a creditworthiness perspective, remaining on track with EFF-prescribed reforms should help secure the next tranche of IMF funding, which is key to bolstering its external liquidity position and ensuring macroeconomic stability.” The IMF praised Pakistan’s reforms in an August 18 release and said GDP growth for year ending June 30 2015 was expected to reach 4.3% versus a provisional estimate of 4.1%. About a year after Sharif came to office in June 2013, the administration’s plans drew strong support from the credit markets. The sovereign saw its outstanding bonds trading at or near all-time lows this April and took the opportunity to lock in new debt at such low yields. Its US$2bn bond offering attracted US$7bn in demand. The tranches of five and 10 years, of each US$1bn, priced to yield 7.25% and 8.25%, respectively. The yields are well below what market participants had expected for a Caa1/B– rated country with a series military coups and only one democratic transition marking its history since independence in 1947. Also, threats are always looming that the government’s reforms will be derailed, sinking its junk credit rating even further. Since August, for example, there hade been regular violent protests in Islamabad, the capital, calling for the prime minister to resign on suspicion of electoral fraud, Reuters reported. Elected politicians, however, will have to continue with reforms in the face of opposition if they want to keep investor support. “There are big political risks, of course, but people know what’s happening on the ground in Pakistan, and there are companies still delivering the numbers.” “Pakistan’s ability to drive structural reforms, despite resurgent political fractiousness, would be a key factor supporting its credit profile,” Shah said. The government continues to press on. The Ministry of Finance recently hired Citigroup, Deutsche Bank, Dubai Islamic Bank and Standard Chartered to run the books on a US dollar sukuk offering. If the financing goes according to plan, it is expected to capture the demand from investors for exposure to the country’s growth prospects, as well as those looking to capitalise on the recent surge in sukuk volume. The trade will follow recent sovereign Islamic bonds from Hong Kong, Luxembourg and South Africa in September. Enticing equity investors In addition, Pakistan is also enticing equity investors. The benchmark Karachi Stock Exchange 100 Index is also up 17.6% for the year to last Tuesday, when it was quoted at 30,109.5. “Valuations are pretty cheap and, if you’re get

First mover Source: REUTERS/Athit Perawongmetha An anti-government protester kisses a police officer during a rally inside a compound of the Thai Royal Police Club in Bangkok. When troops took to the streets of Bangkok in May, global investors feared the worst for Thailand. But only weeks after the military ousted the country’s dysfunctional government, Thai companies were back in the international arena with structures that looked more at home in a bull market. State-owned energy company PTT Exploration and Production reopened the US dollar debt market for Thai issuers on June 11, barely three weeks after the May 22 coup. “Thailand is in a perilous state. We were expecting investors to express concerns about the political situation in the country. When we saw the quality and the size of the order book, we felt comfortable to increase to US$1bn and to print tighter.” More remarkably, it did so with a US$1bn corporate hybrid that beat all expectations of size and price, coming 37.5bp inside initial price guidance at a yield of 4.875%. “The deal met the company’s expectation by achieving our funding objective and strengthening our financial position at a competitive price despite the political pressure in Thailand,” said Penchun Jarikasem, executive vice president, finance and accounting group, PTTEP. Leads Bank of America Merrill Lynch, Credit Suisse, HSBC and JP Morgan had planned for an issue size of US$500m–$750m and had placed their bets on selling the bonds at a yield of 5%. The deal drew enormous interest from investors worldwide, ending more than five times oversubscribed with over 300 orders in the book. “Thailand is in a perilous state. We were expecting investors to express concerns about the political situation in the country,” said one banker involved in the deal. “When we saw the quality and the size of the order book, we felt comfortable to increase to US$1bn and to print tighter.” The junior securities are senior only to equities in the capital structure, meaning they are second to last in line for recovery of assets if PTTEP goes into bankruptcy. They also include dividend stoppers, so that coupons are not paid if the company is losing money. The bonds have no maturity and the coupon resets to the original spread over five-year US Treasuries in 2019 with no coupon increase until 2024, when it resets to the original spread over mid swaps plus 25bp. The next reset, only in 2039, is to six-month Libor plus the original spread and 75bp. That structure earned PTTEP 50% equity credit from Standard & Poor’s (for the first five years) and from Moody’s, while the undated notes count as 100% equity for accounting purposes. That meant the company could raise funds without putting pressure on its credit rating of Baa1/BBB+, while at the same time taking advantage of the low interest rate environment before any increase in US base rates. Investors had tried to push back initially. A real-money analyst said a group of institutional accounts had asked for a step-up to be included in the event the bonds were downgraded below investment grade. That could be triggered by a prolonged military rule, according to one rating agency analyst. On the back of a strong feedback during the roadshow, the deal went ahead without the downgrade step-up clause, and a gain of more than one point the following day more than justified the price. “At first, there was uncertainty over investment sentiment following the military coup on May 22. Political tension, however, has had no impact to the recent hybrid bond issuance and our future financing plan,” said Penchun. “PTTEP’s strong credit rating through disciplined capital management is the main reason behind investors’ confidence.” PTTEP is the flagship oil company in Thailand, with PTT PCL, formerly known as the Petroleum Authority of Thailand, as majority owner. Curfews are still in effect in Bangkok, where a military junta has been ruling the country since May 22, when a coup replaced the

Riding the wave Source: REUTERS/Pascal Lauener Surfers competing in the RS:X men’s windsurfing class sail upwind during the second race of the sailing competition in Beijing. Chinese software developer Qihoo 360 Technology is a good advertisement for the US stock market’s appeal for a fast-growing technology company. Its latest convertible bond, priced at the end of July, was expanded to a hefty US$1.035bn, making it the largest international equity-linked deal from Asia in four years and underlining the scale of fundraising available for Asian technology stocks. It also highlighted how far the company has come. Like many US-listed Chinese companies, it has been the target of short-sellers, especially after scandals at the likes of Sino-Forest Corp planted doubts in the minds of investors about the veracity of PRC accounting. It managed to overcome a caustic research report from Anonymous Analytics in July 2012, which had claimed it would be forced to delist. Qihoo’s stock has gained more than 400% since then. Qihoo had built rapport with investors after a US$600m CB in August 2013, which was also increased in size from a base of US$500m. Investors who had bought that bond made money and were happy to support Qihoo when it returned to market about a year later. “We view Qihoo’s CB as the most impressive execution this year, as it was oversubscribed and traded above par, despite an aggressive structure and challenging market conditions.” The company’s CB offering this year used a dual-tranche structure to create price tension. It told investors the total base size would be US$900m and each tranche, with tenors of six and seven years, would be at least US$300m in size, giving it flexibility to distribute the remaining US$300m between the two depending on demand. The six-year tranche, with an investor put at the end of the third year, priced in the middle of the target range. The coupon was set at 0.50%, off guidance of 0.25%–0.75%, with the conversion premium at 37.5%, versus guidance of 35.0%–40.0%. The seven-year bond, with a put after five years, priced with a coupon of 1.75%, from a range of 1.50%–2.00%, and a conversion premium of 32.5%, the low end of guidance of 32.5%–37.5%. The six-year tranche proved the most popular, but the slightly cheaper pricing on the seven-year helped balance demand and, in the end, the two tranches were sized at US$450m apiece, with a US$67.5m greenshoe for each. “We view Qihoo’s CB as the most impressive execution this year, as it was oversubscribed and traded above par, despite an aggressive structure and challenging market conditions,” said Jim McDonnell, head of equity-linked origination for Asia Pacific at Credit Suisse. “Regarding the structure, Qihoo’s CB was the largest new issue since 2010, its average tenor was longer than nearly all other CBs of US-listed Chinese issuers, and the pricing was materially more issuer-friendly than Qihoo’s prior CB. “On the day we were in the market, most equity indices were down around 2%, and Argentina went into default. The incremental demand generated by splitting the deal into two tranches helped overcome these challenges and also saw Qihoo smooth out its debt maturity schedule.” At the final pricing, implied volatility for the 2020 bond was 36% and the bond floor 84.5, with credit spread assumed at 500bp. Implied volatility for the 2021 was 33% and the bond floor 77.0. The offering drew a total order book of US$2.5bn–$3.0bn, with around 115 investors on the six-year tranche and 105 on the longer bond, although more than 75% of them bought both. Demand was broad, with some huge orders from Asian accounts. Citigroup and Credit Suisse were joint bookrunners on the issue, which had to overcome strong headwinds. The stock plunged 7.9% on July 31, the day of pricing, due partly to hedging by CB investors, but also due to a sell-off in the tech segment that day. The Dow Jones Index dropped 1.9% and Google and Facebook were harder hit, falling 2.7% each. Th

Clearer reception Source: REUTERS/K.K. Arora A man makes a call in front of an advertisement for India’s Reliance Communications in the northern Indian city of Mathura. Indian telecom group Reliance Communications has been through the ringer in recent years, having faced intense competition, high leverage and a scandal surrounding 2G licences that led to the arrest of several executives and the questioning of its owner. Financing has been a struggle. The company pulled a Singapore trust listing for its undersea cable unit, GTI Trust, in 2012, having attempted to raise up to US$1bn at a double-digit yield. It has also fallen out of favour with many international lenders, and turned to a group of state-owned Chinese banks to refinance a US$1.2bn convertible bond in early 2012. Earlier attempts to sell telecom infrastructure and an international unit also fell through. An equity raising was crucial to RComm’s ability to refinance its debts, but, when the company first approached bankers in late 2013, the outlook was bleak. The stock was facing sell recommendations across the street, and soft sounding for a US$200m–$400m equity offering at investor meetings in early 2014 fell flat. “Given past feedback, we decided to tap existing large investors that understand the company better than all others.” The mood at the time was decidedly negative towards the scandal-hit sector and investors were nervous about the looming elections. That all changed after Narendra Modi’s landslide victory in May, and RComm and its advisers spotted an opportunity to try again. Bankers floated the idea with a major US-based existing investor that agreed to invest only if the offering raised a meaningful amount of new equity to deleverage the company, and if RComm’s controlling shareholders also put up some of their own money. “Given past feedback, we decided to tap existing large investors that understand the company better than all others,” said a banker close to the deal. “There was a concern that a small equity raising wouldn’t make much of a difference to the company’s leverage, while a US$1bn target would do a lot.” RComm’s management settled on a parallel issue of warrants and preferential shares to the controlling Anil Dirubhai Ambani Group, and the anchor investor agreed to match the near US$217m preferential allotment. Other investors, including a Canadian pension manager and US mutual funds, signed up as anchors, and nearly 60% of the deal was covered with such orders before launch. RComm announced the preferential share allotment before the launch of the qualified institutional placement, which helped build momentum for the share sale as it was seen a sign of the promoters’ confidence in the company. The terms of the preferential allotment were tweaked to reinforce that confidence further. Under Securities and Exchange Board of India rules, only 25% of the preferential tranche needed to be settled immediately, and the remaining 75% could be made in 18 months. RComm’s promoters agreed to put in 50% upfront and pledge the rest come March 2015, well inside the 18 months allowed. RComm’s offer price of Rs142.14 was at the maximum 5% discount to the floor price of Rs149.61, and a 6.1% discount to last Tuesday’s close. The stock closed 0.1% higher at Rs151.45 the next day, after the placement. Under Indian rules, companies can offer a discount of no more than 5% on the floor price. Four long-only institutions from the US and the Middle East received chunky allocations, equivalent to more than half of the base deal. Around 60% of the book went to long-only institutions, and 40% to local institutions and hedge funds. More than 50 accounts participated in the transaction, which was covered within an hour of launch, but only 40 received allocations. Alongside the QIP, the company also issued to the promoters at Rs150 each 86.7m warrants, which can be converted into shares for Rs13bn, or US$217m. The QIP was the largest such sale in the Indian equity marke