Americas Structured Equity Issue: Twitter's US$1.15bn six-year convertible bond

When issuance falls by 48% in a single year, those with one fighting style find themselves condemned to obscurity. Standing out in a year when most banks have been reduced to a handful of trades should be nigh on impossible, yet the twitching muscles of UBS showed that no two trades need to be alike – and a struggling market is no reason to be unambitious. The slash in activity inevitably is accompanied by a collapse in fees as bankers battle to the last basis point to secure every possible mandate. The only way to make money is to offer something different to the client and then be rewarded for it. UBS is possibly the only bank active in EMEA to boast an increase in fees in 2018. “Each of our deals unlocked a problem, so we earn proper fees,” said Armin Heuberger, head of EMEA equity-linked at UBS. A quiet year for new issues should have ensured a bid for the rare deals that did come along. Yet that didn’t turn out to be the case as bankers frequently pushed too far on terms – over-promising is another sure-fire way to pick up mandates – leading to the horror of deals where banks were left holding bonds. When fees are abysmal there is no cushion to absorb losses on trades and there was no excuse for such bad business. UBS took a different path. It had never been big in non-dilutive convertible bonds – a straight-debt substitute – as they pay bond-style fees. Yet it was at the forefront of the development of an enhanced NDCB for Swiss Re that delighted the client, pushed the boundaries of what could be done by relying on investors trusting the issuer, and has potential to drive further issuance in the coming years. Christened discretionary equity bonds – highlighting that the passing years has seen volumes and nomenclature become less impressive – in a public market first, Swiss Re has the right to convert the bonds and settle with stock at any time. The Swiss reinsurer will almost certainly never exercise that right, but such an option meant the structuring and marketing had to be clear and precise. UBS’s role was clear as the structuring bank in a multi-bank syndicate. Taking a sometimes challenging structure, making it more complicated and yet at the end getting paid and seeing it sell easily is an impressive feat. “It is no longer a debt surrogate – it is equity on demand,” said Koby Englender, part of the equity-linked team. It is IFR’s EMEA Structured Equity Issue of the Year. A standout trade for other reasons is the sole books mandate for chemicals maker Sika. Fresh from settling a three-year plus battle with shareholders over its future, Sika secured SFr1.65bn (US$1.65bn) from an upsized seven-year convertible bond issue through sole bookrunner UBS with a conversion premium set 36% above its all-time high share price. The success of the jumbo convertible was not certain as the two previous sizeable deals – both backstopped – had flopped, traded down, and left lead banks holding unsold bonds. The convertible was used to repurchase shares from Saint-Gobain to settle a long-running dispute, but at a lofty price that meant a convertible was a natural choice. At SFr1.65bn it is the only EMEA equity-linked deal to top US$1bn in 2018, but more significantly it is the largest sole-led convertible in Europe for nearly two decades, dating back to Vivendi’s €1.5bn (then US$2bn) CB in January 1999. The €200m convertible for Consus Real Estate in November 2017 on the surface seemed to be yet another vanilla bond for a real estate company – the one thing equity-linked hasn’t been short of in recent years. In fact, it was anything but ordinary. Consus had completed a backdoor listing in April 2017 but just days before issuing the convertible it had wrapped up an all-stock acquisition that took its market capitalisation from €200m to €700m. The German company was so new that there were no audited

Swiss Re had a specific need. The reinsurance giant wanted to replace perpetual bonds that had incorporated an any-time put feature and had been sold to fixed-income investors. “We felt that feature was better suited to equity-linked investors,” said Daniel Bell, head of funding at Swiss Re. The cost would also be lower. The solution was two years in the making and far from simple, requiring equity-linked, hybrid capital, derivatives and fixed-income teams working together with lawyers. At its heart this was a US$500m six-year issue of non-dilutive convertible bonds – a structure that may not be old but that seemed to have outstayed its welcome in equity-linked, as Carrefour found when its NDCB offering could not be fully sold in March. The any-time conversion right for the issuer and call option hedge provided a “market-friendly solution to cost-effective capital on tap”, said Armin Heuberger, head of EMEA equity-linked at UBS, a bookrunner alongside Bank of America Merrill Lynch, Barclays, Deutsche Bank and JP Morgan. “The structure insulates Swiss Re from unforeseen and unquantifiable risks and is dilutive only at Swiss Re’s discretion as the convert is hedged via a mirroring call option.” If conversion takes place when the insurer’s solvency ratio is below 160% of the minimum regulatory capital requirement, then a floor price of 50% of the reference price applies. At issue, the Swiss Re solvency level was 269% of the minimum and it would take five one-in-200-year events to get close to the 160% level. “You would need all five events to take place so quickly they can’t take another remedy,” said Xavier Lagache, head of EMEA equity-linked at Deutsche Bank. Nonetheless, a hurricane in the US put a potential September 2017 transaction on the back-burner as it could have been interpreted as driving the deal. In order to ensure the complexity would not limit interest to just hedge funds, bankers ran a two-day pre-sounding process, resulting in around 60% of the deal being allocated to outright investors. The result was a 3.5% coupon, higher than would have been possible with a vanilla CB from a Single A rated company but an estimated saving of over 100bp versus selling to fixed-income investors. It remains to be seen if the structure will be replicated, but it is another option for bankers to pitch, and shows the flexibility for structured equity to solve bespoke issues. “The transaction is something we could look to replicate and maybe build upon,” said Bell. ”Prior to redeeming the perpetual bond in September 2017, we had two bonds with roughly US$1bn outstanding that we could convert into equity. This transaction replaced the first bond. The second bond was redeemed in September 2018. This transaction shows that we have good access to a new investor base and could therefore do more but we would not want to do too much.” To see the digital version of IFR Awards 2018, please click here. To purchase printed copies or a PDF of IFR Awards 2018, please email gloria.balbastro@refinitiv.com.

International equity-linked issuance from Asia more than doubled in 2018, and Credit Suisse used its experience and relationships to do more deals in more countries than any other bank. The bank was a regular feature in the offshore Chinese market, moving quickly to seize a window early in the year, and it also helped issuers in Australia, South Korea and Vietnam raise funds during IFR’s review period. Credit Suisse impressed with a broad range of public deals, covering high-grade and high-yield credits and a mix of structures, from zero coupons and dual-currency benchmarks to CB/stock placement combos, equity swaps and liability management. It is clear the bank values structured equity – both public and private – as a core part of its Asian offering, and has lost none of its focus under Aaron Oh, who took over as head of structured equity origination for Asia-Pacific following the retirement of Jim McDonnell in 2017. It was quick to spot market trends in 2018, completing three out of the five CBs from the Chinese property sector in January as debt-laden developers seized a chance to capitalise on surging stock prices. The bank raised HK$2.79bn (US$358m) for Cifi Holdings Group and HK$1.99bn for Powerlong Real Estate. A tenor of 363 days for both deals allowed the issuers to move quickly, as bonds with maturities under one year do not need to be registered with China’s National Development and Reform Commission. Credit Suisse also completed a HK$18bn convertible bond issue for long-term client China Evergrande Group, the largest offshore equity-linked deal in Asia-Pacific ex-Japan since 2001 and the largest ever from the Chinese real estate sector. Chinese property developers were the biggest source of new convertible bonds in the year, with five deals raising a combined US$5.2bn, but investors were soon looking for alternatives as stock prices weakened. The US$610m dual-currency CB of South Korean chemicals maker LG Chem was the highlight of the year. A rare sole mandate for a deal of its size in Asia’s competitive equity-linked market, the transaction was the first US dollar and euro dual-currency offering from a South Korean issuer. It gave the issuer a neat way to monetise treasury shares it had acquired from its purchase of LG Life Sciences the previous year, while the currency mix suited its global funding needs and maximised investors’ appetite for the deal – as they had two currencies and different conversion premiums to choose from. Credit Suisse also brought innovation to Vietnam, a market that drew increasing attention from international investors in 2018. The bank, again as sole bookrunner, helped Vietnamese property company No Va Land Investment Group raise US$310m from a top-up share placement and convertible bond issue – the first concurrent CB offering and equity placement in Vietnam. At US$160m, the CB portion was also the largest debut issuance from the country. The bank has dominated Vietnam’s equity-linked sector since it brought Vingroup, the country’s biggest developer, to the market in 2009, working on all six equity-linked offerings from Vingroup since then. During IFR’s awards period, Credit Suisse, as a joint bookrunner, helped Vingroup subsidiary Vinpearl, a resort developer, raise US$325m in June from the sale of an exchangeable bond issue with Vingroup as underlying. Vinpearl reopened the deal and raised an additional US$125m in October – this time with Credit Suisse as sole bookrunner – to bring it to a total size of US$450m, the biggest deal of its kind in a frontier market. In Australia, Credit Suisse was one of the two banks that led the €230m seven-year CB issue for Cromwell Property Group, the largest CB offering in the country since 2011, and sole buyback agent on a €93m repurchase of outstanding CBs. To see the digital version of IFR Awards 2018, please click here. To purchase printed copies or a PDF of

A US$610m dual-currency convertible from South Korean chemicals maker LG Chem showed the potential for innovative equity-linked issuance from the country. LG Chem launched three-year convertible bonds split between €315.2m and US$220m tranches on April 10. South Korean issuers typically prefer to sell such instruments domestically, and LG Chem had never previously looked offshore. However, the acquisition of LG Life Sciences the previous year left it looking to monetise a stash of treasury shares, and the CB format met its objectives well. Despite being a debut international issuer, LG Chem was not shy at testing a new structure. The CB issue was the first US dollar and euro dual-currency offering and also the first undocumented offering from a South Korean issuer. Both tranches were launched at aggressive terms, with a zero coupon and zero yield. The euro tranche was marketed at a conversion premium of 40%–50% while the US dollar tranche guidance was 25%–30%. To simplify the issuance process and allow greater flexibility in timing, the deal was executed as an undocumented offering, where there is no specific deal disclosure. Investors were comfortable with the lack of offering circular, thanks to LG Chem’s status as a blue-chip company with a reputation for good corporate governance. As a result, the deal managed to generate strong demand from investors in Asia and Europe with participation mainly from outright buyers. The deal had been structured to maximise interest from all types of CB investors. Some liked the US dollar tranche as it carried a lower conversion premium and provided more equity upside (the bond floor ended up at 90). Others preferred the euro tranche as a defensive play in a low-rate environment. The euro tranche was more popular than the US dollar one, allowing it to be priced at the mid-point of the conversion premium at 45%. The US dollar CB was priced at the low end of 25%. For Asian investors, the LG Chem deal also offered them some diversity in their China-heavy portfolios. For the issuer, the dual-currency structure allowed it to raise funds for overseas investments as LG Chem has diversified businesses and a global footprint. Credit Suisse was the sole bookrunner. Both CBs traded well a day after the issuance. The US dollar CB traded at 100 in the secondary market, while the euro was quoted at 101. Credit spread was assumed at 80bp and stock borrow cost at 50bp. Implied volatility for the US dollar tranche was 30. For the euro piece, implied volatility was in the mid-20s. To see the digital version of IFR Awards 2018, please click here. To purchase printed copies or a PDF of IFR Awards 2018, please email gloria.balbastro@refinitiv.com.