Getting paid to issue debt is an extraordinary feat, yet E.ON achieved this with its exchangeable bond converting into the extremely illiquid Swiss energy company BKW – even when there was a competing convertible from BKW in the market at the same time.
E.ON was looking to sell its non-core 6.7% stake in BKW, while unbeknown to it, BKW wanted to avoid the Swiss requirement to pay tax on treasury share holdings after holding them for over six years. The illiquidity of BKW meant a block sale of E.ON’s stake would be challenging and could destabilise the share price. However, an exchangeable bond would avoid these issues, while BKW could postpone any tax hit until after maturity if using the treasuries as the underlying for a convertible bond.
The two deals came together with UBS at the helm of both as sole bookrunner. A single bank syndicate is almost as rare as concurrent deals in the same underlying, but was deemed necessary to ensure the two deals did not compete with each other. The two were differentiated through the use of different currencies, tenors and dividend treatments.
By the time E.ON came to market, nine companies in 2014 had issued equity-linked bonds with zero yield but no lower, suggesting a psychological floor had been reached.
UBS added guidance on the issue price of 100–102 to the normal coupon (0bp to 25bp) and premium (20%–25%) ranges. This meant that at the best terms for investors there was a coupon but at mid-terms the yield was actually negative, with the 101 issue price more than offsetting the one-eighth coupon. The move capitalised on investors often putting in large orders at best, smaller at mids and nothing at worst. Once the book was covered at mids it was then relatively easy to squeeze the coupon down to zero, giving a yield to maturity of minus 0.248%.
Investment-grade ratings are catnip for CB buyers and the combination with a small deal size of €113m (for proceeds of €114.1m at the 101 issue price) allowed for the first negative yield in the European equity-linked market for more than a decade.
In many ways those terms made sense for investors, as other investment-grade paper was trading with greater negative yields. And 25bp per annum was an appealing worst-case scenario in September for many investors that had lost far more when the secondary market traded off pre-summer.
The target to offload the stake through the bonds is helped by E.ON passing through the full dividend to bondholders, a move that also helped ease the passage to negative yield.
There was no stock impact on the day, which was remarkable considering the shares underlying BKW’s SFr163.4m six-year bonds and E.ON’s exchangeables represented two years’ trading.
To see the digital version of the IFR Review of the Year, please click here.
To purchase printed copies or a PDF of this report, please email email@example.com.