Yen Bond: HSBC’s ¥181.8bn triple-tranche bond

Read the Review of the Year 2016 – including articles on each of the IFR Award winners – here

It’s normally fair to say that bankers grumbling about the state of the markets deserve the same sympathy as farmers moaning about the weather. It goes with the territory. And it is up to them to simply get on with it. And yet they had more than enough to whinge about in 2016. The year was bookended by two crises. It began with panic in the bank capital market and a vicious sell-off in Additional Tier 1 bonds. The worries turned out (for the moment, at least) to be overdone. And, as this Review of the Year goes to press, a crisis in Italian banking looms. Will those worries turn out to be overdone, too? We might not have to wait long to find out. It is no coincidence that both squeaky bum moments centred on Europe’s still wounded banking system. Some eight years after the financial crisis, too little progress has been made in getting the continent’s financial system back on a sound footing. Against that background, it is no surprise that IFR’s Bank of the Year award has gone to a US institution. Indeed, the gap between the power, profitability and stability of the banking systems on either side of the Atlantic should be a major concern for European regulators and politicians. In between those moments of panic at the start and end of the year, there was no shortage of other dramas, including the (likely) self-harm of the Brexit and Trump votes and the (guaranteed) self-harm of buying negative-yielding bonds. And yet it was still a year of extraordinary deals – all the more impressive given the turmoil. We highlight the best of the best here. IFR sends its congratulations to all those clever people involved in constructing these transactions. But before you all get too carried away, a word of caution may be wise: brilliant though many of the dealmakers honoured here are, it’s really got to help that the world’s central banks are handing out free money hand over fist and buying up large chunks of the markets. To return to those farmers: the wise ones know that they grew a bumper crop because conditions – sun and rain at the right times – worked in their favour. Similarly, sensible bankers know that for all the volatility of 2016, they’ve been acting with a strong wind behind their backs. To see the digital version of this review, please click here. To purchase printed copies or a PDF of this review, please email gloria.balbastro@tr.com

Here at Bellwether, we are more than used to moving in exalted circles, such is the high esteem in which we are held. But even we have to admit to being a little star-struck when Great British Bake Off heart-throb Selasi Gbormittah was wheeled out like a dessert trolley to serve some biscuits at one of Deutsche Bank’s awards pitches (although, disappointingly, Gbormittah – a transaction banker at Deutsche – hadn’t made the biscuits in question). For those who have been living under a rock for the past half a dozen years, GBBO is where a bunch of talented amateurs compete for a largely valueless trophy but plenty of kudos and the prospect of lucrative future employment. So entirely different from the IFR Awards. Pitch meetings can often entail little more in the way of fun than trying to slice through league table positions more inflated than a souffle and claims to greatness so self-raising they would make a Victoria sponge blush. Anything to sweeten the experience is icing on the cake. Deutsche sought to convince us that it has been on something of a FIG roll. But the appearance of the housewives’ favourite banker-baker got us thinking about the scope for possible product development, particularly within the realm of – apologies – hybread securities. We just have to hope a surfeit of Additional Tiered Bun does not lead to Tier 2 diabetes. BELLWETHER WOULDN’T WANT to suggest that the awards pitching process is anything other than thoroughly enjoyable, but it’s remarkable the lengths some IFR hacks will go to avoid it. One of our team, for instance, contracted a blood-borne form of E Coli and was ill just in time to avoid the first pitches and returned just a day after the last. He was outdone by another IFR journo whose paternity leave coincided – if that is the word – precisely with the two weeks when pitching was at its most intense. The hack in question has form in this regard, having done precisely the same three years before. Once could be a coincidence. But twice surely requires careful timing and the enterprising use of thermometers. A LOT OF time is spent in awards pitches sorting between the truth and the, er, embellishments. But rarely is that process as easy as in one videoconference bringing together bankers from around the world. Arriving early, the IFR team was able to check in with bankers in London and Asia who said how exciting it was to use this novel technology for the first time. A few minutes later and the US office was on stream and immediately in pitching mode about the bank’s joined-up team. “We are very global. This isn’t our first videoconference, you know,” he said. THERE WAS MUCH boasting about the banking industry’s efforts to improve diversity. But there is still much to be done – especially in the derivatives world. More than 50 individuals pitched for derivatives awards this year, but just four were women (two of whom dialled in by phone). And that’s probably an all-time high. To see the digital version of this review, please click here. To purchase printed copies or a PDF of this review, please email gloria.balbastro@tr.com

China completed its takeover of the Asian capital markets in 2016 – at least in terms of numbers. Combining debt and equity in all currencies, nine of the region’s top 10 underwriters are Chinese. Where four global banks ranked among the top 10 in 2015, only HSBC – arguably the most Chinese of the global banks – managed that in 2016, ranking ninth on the Thomson Reuters league table. The step change in 2016 has come from the growth in outbound investment from China, sluggish deal flow elsewhere in Asia and the continued growth of China’s local capital markets. “The rise of the Chinese banks is a trend that has been discussed for quite a number of years, although I think that there is a marked difference this year compared with the last,” said Alan Roch, head of Asia debt syndicate at Australia & New Zealand Banking Group. “Most of the pipeline in Asia has been overwhelmingly in China in the past year, which plays into the strengths of the Chinese banks because of their relationships in the mainland. I think this is a trend that is likely to continue.” Samson Lee, head of debt capital markets at Bank of China International, argues local arrangers have benefited as their onshore clients have expanded. “I think it’s primarily due to a change in the market landscape. In the last few years, the amount of international DCM business from China as a proportion of overall Asia revenue has grown significantly,” he said. “At the same time, whereas previously most of the issuers were central SOEs, which may have favoured the foreign banks, we’ve seen more private corporate and domestic SOEs lately coming to market.” Rethinking ECM In equity underwriting, mainland brokerages Haitong Securities, China Securities and Guotai Junan Securities now rank among the top 10, displacing bulge-bracket banks such as Goldman Sachs and UBS. “A lot of our peers were previously concerned about the Chinese banks establishing a foothold in the debt capital markets but what we’ve actually seen is more Chinese brokers entering the equity market as a result of business in Hong Kong,” said an ECM banker at a major international bank. Whereas, previously, global investment banks benefited from a steady stream of listings from some of China’s major state-owned enterprises, the number of new offerings from this sector has gradually started to dry up, and the ones that do look overseas are now looking to reward mainland relationship banks with IPO roles. This trend has coincided with a steady decline in the role played by global institutional investors in the Hong Kong capital markets with the influence of friends and family corporate investors from the mainland rising “The problem lately for the western banks is that the foreign institutional investors have lost interest in the Hong Kong IPO market,” said Henry Shi, head of corporate finance at Haitong International, currently the top arranger of Hong Kong IPOs in 2016. “The reason the Chinese banks are top of the league tables is their connection to investors, particularly the Chinese corporates.” “Most of the Chinese banks, including Haitong International, also provide financial support to the subscribers for an IPO. Some of the western banks do provide this also but it’s usually from their private banking arm rather than their investment banking division.” The importance of mainland relationships has also inflated the number of bookrunners on recent deals. For instance, Postal Savings Bank of China appointed 26 bookrunners for its US$7.4bn IPO in September, even though it sold 77% of the shares to six cornerstone investors. “Bookrunner roles perhaps don’t mean as much as they used to,” said an ECM banker. “It’s obviously great for league table roles but it’s usually only the joint global coordinators and sponsors that get paid on any deal.” DCM down A similar trend is playing out in the debt capital markets, where Asian issuers traditionally needed to appeal to US and European fund managers in order to sell

The nation was a default pariah, locked in a seemingly endless battle with hard-nosed hedge funds that rejected the terms of a debt restructuring – and wanted to be paid in full. But new President Mauricio Macri came to power, insisted on reaching a deal with the nation’s holdout creditors, and paved the way for Argentina’s return to the international markets. The result was a landmark US$16.5bn bond. “The Argentina trade is never going to be replicated,” said Dennis Eisele, head of EM syndicate at Deutsche Bank, a joint global coordinator with HSBC, JP Morgan and Santander. Even after Macri made it clear he wanted a deal with the holdouts, the assumption was that Argentina would pay them off wholly or partly in bonds – securities that were expected to come with hefty coupons. But Macri’s finance team took a different tack, betting on Wall Street’s advice that it could raise US$10bn or more from international investors at much lower costs. That was far from a foregone conclusion for a country still in technical default, and one facing significant legal challenges in the US courts. “Everything needed to take place with a perfect seamless execution in order to have a successful offer,” said Katia Bouazza, HSBC’s co-head of global banking for Latin America. The process also involved an unusual dual-stage settlement mechanism to ensure that a pari passu injunction handed down by the courts was lifted by paying the holdouts first. Argentina set off on a five-day roadshow to market a deal comprising three, five, 10 and 30-year tranches in an effort to appeal to the broadest audience possible. Many investors vowed they would never buy a 10-year from Argentina for less than 8%. But yet again, the sovereign defied expectations. Not only did it secure a 7.5% yield on that tenor, but it generated a truly remarkable US$69bn of demand for the entire deal from over 800 accounts. That book still stands as the largest in emerging markets history, even surpassing the US$67bn in demand seen on Saudi Arabia’s US$17.5bn bond in October – the deal that broke Argentina’s record for largest EM deal ever. And the deal helped re-establish Argentina on the international stage as a nation open for business. “This was a huge step forward in terms of the confidence of investors to continue to put money into the country,” said Sergio Lew, head of US credit markets at Santander. To see the digital version of this review, please click here. To purchase printed copies or a PDF of this review, please email gloria.balbastro@tr.com

“Restructuring is about how you make lemonade out of lemons,” said Tim Coleman, head of the restructuring and special situations group at PJT Partners. The crucial part is keeping warring creditors from destroying the lemons – or breaking the jug. In another relatively quiet year for restructuring, PJT was ranked at the top of the list for closed assignments owing to the firm’s determination to push transactions over the finish line, getting the best result for all parties involved. It was honest broker in significant deals in energy, gaming and banking as well as the municipal space. One of the best examples of PJT’s skills was the speed with which it moved Arch Coal through the bankruptcy process in less than nine months.  “So much of a company’s success in managing the process is who they align with from a financial advisory standpoint,” said John Drexler, chief financial officer at Arch Coal. The ongoing collapse of coal prices pushed some of the largest and strongest producers over the edge in 2016. PJT’s deep sector experience made it well prepared to advise Arch. Initially, the firm worked on a distressed debt exchange for Arch but the continuing fall in prices made that unworkable. When Arch filed for bankruptcy protection in January it had plenty of company. Rivals to follow suit included Peabody Energy, Alpha Natural Resources, repeat offender Patriot Coal and Walter Energy, which PJT also advised. “When we started the case we told the judge it was our goal to emerge from bankruptcy protection in September,” said PJT partner Mark Buschmann. The firm was determined to drive the process and that meant keeping creditors engaged and willing to negotiate. “From the time we filed bankruptcy to the time we reached a consensual resolution between the secured lenders and the unsecured parties, the entirety of the focus was to get us in position to allow those groups to arrive at a consensual agreement,” Drexler said. That put PJT in the middle as the honest broker closing the gap between the two groups. When PJT put the creditors in a room to hammer out a final agreement it was risky but it paid off. An agreement was struck in July allowing Arch to eliminate US$4.8bn in debt. The spot price of the metallurgical coal that Arch mines was US$70 per tonne when the company filed. The company emerged from bankruptcy protection in October. By November the price of met coal had surged above US$300 per tonne. “So this has all been a significant incremental value for us,” Drexler said. “Despite the fact that we’ve seen this type of market recovery, without a restructuring it still would have been incredibly difficult to support the US$5bn debt load.” PJT was also able to complete a 35-day pre-packaged bankruptcy reorganisation for Halcon Resources. The energy company had 15 creditor classes – including first, second and third-lien bank debt – but cashflow too weak to service the debts. PJT was able to reinstate the second lien and renegotiate with the third-lien holders and other categories of unsecured creditors to get value down to the equity. “It was not an easy negotiation,” Coleman said. “But we got the votes.” Another innovative deal saw PJT advise insurer MBIA on its position in Puerto Rico, as the commonwealth succumbed to a US$70bn debt crisis. The firm took a leading role restructuring the state power utility’s debt, creating a template for a larger restructuring of the island’s liabilities. Winning over private equity A key element of PJT’s success this year was that since it was no longer part of Blackstone, it was now able to advise other alternative investors more freely in their restructurings. Even under the Blackstone umbrella, the practice was strong enough to be able to pick up some prized mandates. It is advising Apollo and TPG, for example, in casino group Caesars Entertainment’s restructuring. That long-running case may finally close if a novel approach advocated by PJT to turn Caesars Entertainment Operating Co i

Like other banks in Europe, the Danish mortgage lender was aware that it had to raise billions in loss-absorbing debt to satisfy regulators that creditors rather than taxpayers will shoulder the costs of future crises. French banks had been widely expected to pioneer a new type of senior debt to meet those requirements, but Nykredit beat them to it, pricing a ground-breaking €500m three-year senior resolution note issue in June. “This was the deal of a lifetime for us,” said Nicolaj Legind Jensen, head of funding at the Danish lender. The rationale was twofold. In addition to its regulatory requirements, Nykredit risked remaining on negative outlook at S&P without raising this debt. But with costs under intense scrutiny ahead of an envisaged IPO, Tier 2 issuance was simply not an option. Nykredit’s funding team therefore structured a new senior instrument, bringing BNP Paribas, Goldman Sachs and Morgan Stanley on-board along the way. The name – one of about 20 options devised by the bank – was crucial to the bond’s positioning in order to avoid overpaying, while also keeping the regulator happy. The strategy paid off. Buoyed by extensive investor work, including 65 meetings for the SRN alone, the book included all the major asset managers, with orders nearing €2.5bn and the issuer saving 125bp compared with a theoretical Tier 2 transaction. The bonds rallied strongly from their reoffer level of swaps plus 110bp despite pricing at the tighter end of the massive 95bp–200bp range guided by investors, highlighting the challenge of pricing a new asset class. Though Nykredit is not subject to the minimum requirement for own funds and eligible liabilities standard that applies to other European banks, it has provided a much needed pricing point in the burgeoning Tier 3 market, and the funding team was bombarded with calls from other market participants. “Where Nykredit Realkredit has gone, we expect many others may follow,” S&P wrote in a note at the time. The ratings agency revised its outlook on the bank to “stable” from “negative” after the issuer’s second deal in the format only one month later, in what was the first unsecured financial euro transaction after the UK voted to leave the European Union. “We think this level of leadership is unsurpassed for an issuer of our size,” said Henrik Hjortshoj-Nielsen, Nykredit’s head of group treasury. To see the digital version of this review, please click here. To purchase printed copies or a PDF of this review, please email gloria.balbastro@tr.com

Banks are under pressure to improve the consistency and transparency around their so-called corporate centres due to concerns that the units have become “black boxes” that are used to make other divisions appear better than they are. Eleven major banks lost more than US$60bn in aggregate in their corporate centres over the past four years, according to IFR calculations. Such losses are not a surprise given that many of the units carry big central costs and bring in little revenue, but investors and analysts said there is concern about the wide variance in what corporate centres include and the opaqueness of some. The biggest worry is that corporate centres can mask the true performances of business divisions when bank bosses are supposed to be making hard-nosed strategic decisions on which businesses to keep and which to get rid of. “It can create a smokescreen around the reality, deliberately or not,” said Jeremy Sigee, an analyst at Barclays in London. “That can create a confused discussion and weakened scrutiny and accountability of divisional management. “The biggest danger is the wrong business decisions get taken, because companies delude themselves about the real profitability of some of their businesses.” “They [management] allow businesses to remain and grow, when the economic reality is some areas are not clearing their cost of capital and they should be shrinking and restructuring, not growing or ‘business as usual’.” Big losses The use of corporate centres is common among big, complex banks. They handle functions used across a bank, such as treasury, capital management, foreign exchange and other hedging functions. They are also used for shared resources such as real estate, human resources, technology, legal, compliance, finance and risk management. JP Morgan employed 31,572 people in its corporate centre at the end of September, which is 13% of its headcount and 11,000 more than at the start of 2013. UBS has 24,059 corporate centre staff, or 40% of its employees. Others use them sparingly, or not at all. Goldman Sachs and Morgan Stanley do not operate with them and allocate all costs and equity to their business divisions. The 11 banks with a corporate centre assessed by IFR lost US$52bn from 2013 to 2015 and another US$9bn in the first nine months of 2016, according to their published results. (see chart) Those losses included some lumpy costs. JP Morgan’s corporate centre booked US$10bn in legal costs in 2013 and BNP Paribas took a €6bn charge in 2014 related to its settlement with US authorities. Citigroup had US$4.4bn of corporate centre legal charges in the same year. Swings in the carrying value of banks’ own debt can be significant items in the central centre, as can complex accounting issues, often related to tax. Of course, there can be big one-off revenues too. This year European banks booked substantial income in corporate centres from the sale of their stakes in credit card company Visa Europe, for example. Banks’ results show costs are far more common than income, however, and often include goodwill charges on past bad acquisitions, or restructuring expenses. HSBC reports its central costs in “other”, which made a pretax loss of US$3.5bn in the third quarter of 2016 alone. That included movements in the value of its own credit and restructuring costs. In recent years HSBC has reported an annual loss of just over US$2bn in “other”. Santander’s corporate centre incurs the cost of hedging the capital adequacy of its overseas subsidiaries and with the gap between high interest rates in Brazil and low euro rates that annual cost has been substantial. Santander was also criticised for booking charges relating to mis-selling payment protection insurance in its British business through its corporate centre, but the bank said legally all the PPI charges were booked through the UK business and were fully in the UK unit’s accounts. It said the losses were included in the corporate centre because they covered hi

It took joint bookrunners Deutsche Bank and Morgan Stanley months to prepare for the US$10bn sell-down, split between a US$3.4bn block trade and a US$6.6bn mandatory exchangeable, Asia’s largest convertible issue and the second-biggest equity-linked deal in the US. Instead of pressuring the market with a giant block trade, the mandatory exchangeable trust securities allowed SoftBank to sell some of its shares at a premium and defer tax obligations, while the format appealed to investors looking for both yield and growth. Before the transaction, SoftBank was sitting on an Alibaba stake worth more than US$60bn, equivalent to 90% of SoftBank’s own market capitalisation. SoftBank’s initial investment was so profitable that virtually the entire proceeds of the sale would count as a capital gain – taxed at 30% in Japan. To ease that burden, most of the deal was structured as mandatory exchangeable trust securities. The bonds convert into Alibaba stock in three years, like a typical mandatory. But unlike a typical mandatory, the underlying shares are held in trust and delivery can be settled in cash or stock, thereby allowing SoftBank to defer tax obligations while retaining economic control. From an investor’s point of view, the deal offered something that Alibaba’s shares do not – a dividend. The METS offering, launched at a base deal size of US$5bn, was marketed at a coupon of 5.25%–5.75% and an exchange premium of 17.5%–22.5%, allowing investors to enjoy an attractive dividend and potentially benefit from an upside in the stock. The deal was priced at a 5.75% coupon and 17.5% conversion premium, the investor-friendly ends of talk. Specialist equity-linked accounts that did not own the underlying stock subscribed heavily to the new issuance, as did equity income funds that cannot own Alibaba since it has not paid a dividend since listing in 2014. Shares in Alibaba closed at US$76.69 on June 1 when the METS issue was launched. By November 15, the stock was at US$91, or 18.7% above the reference price. While the structure is commonly used in the US, it is relatively new to Asian investors and hence more investor education needed to be done in the region. Eventually, about 55% of the deal went to US investors, 27% to Asian investors, 12% to Asia-based global funds and 6% to European buyers. By investor type, outright investors took 55% of the trade and hedge funds 45%. Combined with the block trade, the exchangeable will reduce SoftBank’s stake in Alibaba from 32% to about 27%. Goldman Sachs and Mizuho Securities were co-leads. To see the digital version of this review, please click here. To purchase printed copies or a PDF of this review, please email gloria.balbastro@tr.com

It was the largest convertible bond in the awards period, and one of only three to feature a 10-year tenor. The trade appeared to be the latest bit of wizardry from CEO Charlie Ergen, who defied expectations in the first place by touting satellite TV in the early 1990s. When others didn’t believe, Ergen did, using cashflows and assets to back the debt used to roll out his satellite-based TV network. But with Dish’s wireless spectrum – a frequency range for phones, not broadcast, that the company currently does not use – unlocking value was rather a different proposition. To provide flexibility, Dish sold the security directly as parent Dish Network, rather than the Dish DBS operating subsidiary that houses its traditional satellite business pledged as collateral for all of its loans and bonds. “The satellite TV business had about US$14bn of debt against it,” said Faiz Khan, a managing director in equity-linked origination at Deutsche Bank, sole bookrunner on the bond. “The view of our leveraged-finance counterparts was that it was going to become expensive to access the high-yield market,” he told IFR. “They did not want to encumber the wireless spectrum, because they wanted to maintain flexibility to sell, partner or roll out their own wireless network.” On the afternoon that the CB was priced, S&P downgraded Dish’s credit rating by one notch to B+, citing elevated debt and declines in the pay-TV sector (the ratings agency rated the bond issue B–). But by then, Deutsche was in a position to increase the size of the bond offering to US$2.5bn from US$2bn, thanks to demand from long-only CB and crossover high-yield buyers. It placed two-thirds of the deal with those outright accounts at a 3.375% coupon and 32.5% conversion premium, the mid-point of price talk. Then it used its overallotment option to push the deal to US$3bn. Dish sent a bullish message by using some proceeds on a call-spread overlay to offset dilution to share prices above US$86.0825, a 75% premium to the US$49.19 reference price. The company still has plenty of value in its wireless spectrum holdings, estimated at some US$20bn or more. Dish has the option to acquire more spectrum, sell what it has or partner with another company to build its own wireless network. And its US$3bn convertible bond is a financing vehicle that will give it the freedom to explore all of the above. To see the digital version of this review, please click here. To purchase printed copies or a PDF of this review, please email gloria.balbastro@tr.com

Equity-linked transactions were low on the list of preferred funding options again this year. But even though issuance fell in the awards period to an almost two-decade low – US$22.1bn versus US$34.7bn in the previous year – Goldman Sachs cemented its leadership in the asset class. It was a bookrunner on 14 deals (for an almost 15% market share) and lead left on 10 of those, including significant trades for Great Plains Energy, Hess and Chesapeake Energy. Goldman went on to achieve a 10 percentage point market-share gain. Goldman led deals in every active sector during the year, but it was through lead-left roles for recapitalisation and M&A on behalf of natural resources companies that the team was able to flex its muscles. A US$2.5bn dual-tranche offering as part of the financing for Great Plains’ pending US$12.2bn acquisition of rival utility Westar pushed the envelope with a US$7.3bn cash component to finance, versus a US$4.8bn market cap. The bank extended an US$8bn bridge loan and helped secure US$750m from Ontario Municipal Employees Retirement System in the form of a mandatory convertible preferred. The remaining US$6.75bn cash would need to be raised (ex-OMERS) with US$2.35bn of equity/equity-linked and US$4.4bn of debt. As the process unfolded, Great Plains CFO Kevin Bryant was holding daily calls with Charles Park, a managing director in ECM. “Chuck was my best friend for two months,” Bryant said. When Bryant wondered if they could get all the equity done in one transaction – which would make it the largest overnight transaction and largest major fundraising by percentage of market capitalisation ever in the sector – Park told him: “Yes we can.” In September, a peak for utility stocks and well ahead of the acquisition closing, Goldman Sachs confidentially marketed a US$2.15bn, two-part equity and mandatory raise. The overnight execution culminated in the placement of shares representing 40 days’ trading at just a 2.6% discount. The mandatory secured a 20% premium to the equity leg, with a 7% coupon. The greenshoes pushed the combined size to US$2.5bn. The mandatory was an important tool in the sector, which was also employed on NextEra’s US$1.5bn issue – won by Goldman Sachs in an auction – and when Hess was looking to maximise equity credit while limiting equity dilution. Goldman Sachs helped devise the first deal of its kind for Hess: a mandatory convertible preferred (100% equity credit) that included a call spread. The addition of the capped call meant investors bought 8% paper with a 17.5% conversion premium, but Hess was able to raise the premium to 37.5% and potentially reduce equity dilution to below the minimum shares on the mandatory. Only after the transaction was shown to select investors were other investment banks invited to participate on an overnight marketing. The capped call, unprecedented on MCPs because of the high equity content, helped mitigate any equity flow back because purchases of the underlying by counterparties to hedge their risk offset selling by hedge funds purchasing the bonds. Marketing also targeted Hess shareholders to reduce pressure on the stock. Chesapeake Energy’s US$1.25bn 10-year CB saw Goldman again working alone. The deal followed a series of liability management exercises that the embattled natural gas producer had conducted earlier in the year. In addition to a 10-year tenor, the security was subordinate to some US$8.5bn of debt. It was also provisionally callable beginning in 2019 to provide the issuer with flexibility, but robbing investors of potential value. “Goldman Sachs were pitching us on a convertible note, unsecured, which we have not seen for some time in this space,” said Patrick Heringer, assistant treasurer of Chesapeake Energy. “It’s essentially the way to issue equity at premium in the form of a bond at a lower coupon.” Adding even more complexity were simultaneous negotiations with holders of existing convertibles – whose coupons were in arrears – on

To remove dilution, the issuer purchases call options with a strike price equal to the CB conversion price. The structure and pricing had convinced Vodafone, Total and LVMH, among others, to issue convertibles, often for the first time. When a Telefonica synthetic struggled badly in March of 2016 and ENI had to be repriced and reduced in size the following month, many sounded the death knell for the product. But BP was still keen. Raising £400m from seven-year paper, the deal confirmed the UK oil and gas group’s reputation as an issuer with an agile funding strategy. It was risky, however, given preceding synthetic deals, wider ongoing macroeconomic concerns and the looming June UK referendum on EU membership. For BP, there was reputational risk. But for bankers, the survival of the structure was at risk. As a result, they delayed pulling the trigger until the right moment, which appeared to come following an uptick in equity deal performance and an increasingly bullish view on oil. “Few people in the market still believed in synthetics, we had to wait for the right moment for it to work,” said Bruno Magnouat, head of equity-linked origination at Societe Generale, a bookrunner alongside Barclays, Credit Suisse and Goldman Sachs. “It would have been terrible to come out with them on something that did not work.” Then it was a matter of adapting the structure and stripping out some of the more aggressive features used previously, such as restrictive conversion terms. BP was able to issue in any currency, but a euro denomination was avoided on concerns about negative yields on its high dividend. “Sterling had the highest coupon and that 1% coupon really did help with distribution despite having around a 7% dividend yield, and we were still able with the pricing of the call option to generate meaningful savings,” said Steven Halperin, co-head of EMEA ECM at Barclays. Orders for 10% of the deal ensured a strong book of demand, including one UK order comfortably above that level, with two-thirds going to the outrights that are essential for successful pricing. BP was one of just two synthetics at that time in 2016 that had been priced away from best terms for investors; at a 1% coupon off 0.4%–1.2% guidance. That 20bp improvement ensured terms were better than those available from a straight bond. A few weeks later, French auto parts supplier Valeo brought a US$450m synthetic on better terms for the issuer. Macro events, bond buying by the European Central Bank and cheaper straight debt has slowed the rush of synthetic deals, but BP ensured the structure lives to see another day. *Syndicate corrected in sixth paragraph to add Credit Suisse. To see the digital version of this review, please click here. To purchase printed copies or a PDF of this review, please email gloria.balbastro@tr.com