Structured Equity Issue: Posco’s €1.07bn five-year convertible bond

IFR Asia Awards 2021
3 min read
Fiona Lau

Fulfilling potential

A swiftly executed €1.07bn convertible bond helped South Korean steelmaker Posco tap into green funding, reinforcing the ESG theme that is gaining popularity in Asia’s equity-linked market.

Posco’s CB in August, South Korea’s largest equity-linked deal and first green equity-linked transaction, captured the positive momentum towards sustainable financing among global investors and showed that Asian issuers could deliver sizeable green structured equity deals.

To help achieve its ambition to become carbon neutral in 2050, Posco chose to issue a green CB to finance or refinance projects under the green categories in its sustainable financing framework, which include producing materials for electric vehicle batteries and developing renewable energy.

The transaction was launched on a Friday – not the best timing for a billion dollar transaction, especially when it was a public holiday in South Korea the following Monday. However, the deal had been cleared by South Korea’s Ministry of Finance to launch that day, and banks and the issuer decided to push ahead.

To solve the issue of a longer-than-usual equity exposure, a concurrent delta placement was conducted to facilitate hedging for investors who were unwilling to take on the long weekend risk.

The green nature of the CB attracted investors and drove some long-only funds, especially European accounts, to place bigger orders than they would have for a non-green offering from a steelmaker.

The five-year put-three CB was marketed at a zero coupon, with a yield to maturity of -0.97% to -0.69%, yield to put of -1.61% to -1.14% and conversion premium of 40%–50%. The issue price was indicated at 103.5–105.

Demand exceeded €3.8bn with participation from more than 80 buyers, including outright investors and hedge funds.

The strong demand allowed the deal to achieve the lowest yield for a South Korean issuer, as the issue price of 104 gave a yield to maturity of -0.78% and yield to put of -1.3%.

The conversion premium was set at 45% even though the stock had risen 66% in the 12 months before launch. The credit spread was assumed at 70bp, implied volatility at 25% and bond floor at 99.

The top 10 investors took almost half of the CB. Hedge funds took 68% of the deal and long-only investors 32%. Asia bought 58%, Europe 36% and offshore US accounts 6%.

The tight allocation gave the CB solid support in the aftermarket. The CB traded at a cash price of around 104 on its first day and finished 2021 around 100.

JP Morgan, BNP Paribas and HSBC were joint bookrunners.

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