The share price had performed well when discussions first began with Deutsche Bank in March, with the Mexican company – known as AMX – sitting on a pretty profit. But major shareholder and chairman Carlos Slim knew that having such a large exposure to the performance of an independent entity was less than ideal.
The expertise and experience of management – Carlos Garcia Moreno Elizondo has been CFO for 14 years and is a former banker – meant there was little need to pitch the logic of an exchangeable bond, but every structural tweak was explored in depth.
“There was a list of objectives,” said Gavin Deane, global co-head of TMT at Deutsche Bank. “AMX wanted to retain voting rights, board seats, dividends and any action to be cash-settled, to show they remain supportive of KPN.”
Timing was critical to gain maximum value. The European telecoms sector was abuzz with M&A activity and rumour, and KPN was seen to have several admirers. There was also the potential for a special dividend or buyback as a result of KPN’s sale of E-Plus completed in October 2014.
AMX is the best-rated telecoms firm in the world and the deal was certain to comprise a large component of bond indices. While investment-grade bonds are always in hot demand from EMEA equity-linked investors, the depth of demand was unknown as few deals had topped €1bn. Bankers were also concerned that some investors might have limits on how much Mexican exposure they could hold – Deutsche Bank certainly did.
The deal was launched at a cautious €2.25bn through Deutsche (global coordinator) and Barclays as joint bookrunners and soon upsized to €3bn. A huge proportion of demand was nonetheless unsated, with a 2.5 times covered book. It was the largest ever exchangeable by a corporate.
The five-year bonds pay no coupon – and miss out on the dividend – while the premium was struck at 45% on top of a share price already up over 30% for the year. Arguably, some subsequent deals were priced more aggressively, but they were not even comparable in terms of size.
There is no clearer sign of customer satisfaction than a return visit – the lifeblood of equity-linked is repeat issuers – but with so much paper issued at once it seemed that it would be some time before AMX could do more of the same.
Yet just four months later it was back – with Deutsche working alone this time – with a mandatory structure on €750m of three-year paper. Again, the issuer was quids in by passing on only 85% of KPN dividends and the bonds are cash-settled.
Carlos (both of them) defined the year. AMX bonds represent over 20% of the equity-linked bonds sold into Europe, yet through clever structuring and sensible timing any hint of oversupply was avoided.
* Carlos Slim’s role corrected in second paragraph.
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