The equity-linked rally in the EMEA region continued on Wednesday with the return of Spanish utility and market regular Iberdrola, which raised €450m from an upsized green convertible bond that also marked a revival of the non-dilutive structure that had not been seen in Europe since 2018.
Non-dilutive, or equity-neutral, convertible bonds formed a substantial part of equity-linked issuance in Europe from 2015 to 2018. Their prominence was due to the low rates environment and came despite any evident enthusiasm from the buyside or sellside. Investors disliked the extremely aggressive pricing required to make such CBs cheaper than straight debt, while bankers were not keen on the small fees for what was in effect a debt surrogate.
The most recent non-dilutive was in September 2018 when Glencore tapped its US$500m zero-coupon 2025 paper for another US$125m. A few weeks before that, Adidas printed €500m five-year non-dilutive converts that had a negative yield of 0.73%.
As the name suggests there is no chance of dilution as the issuer purchases a call option on its shares matching that embedded in the CB at the same time as issuing the CB.
“At the moment, because of scarcity value, there is a lot of demand for strong investment-grade companies with a positive outlook like Iberdrola, which has a large renewable business during an energy crisis,” said Javier Pollan, head of EMEA equity-linked at Citigroup. “With the recent expiry of the last Iberdrola instrument, outright investors had to look at this week’s deal in order to keep exposure to the name and that created sufficient appetite to price this deal aggressively and make it work.”
Iberdrola issued €500m of NDCBs in 2015 and then tapped the bonds for a further €200m in 2020. They matured in early November.
Thierry Petit, head of EMEA equity-linked at BNP Paribas, said: “It is not a coincidence that Iberdrola priced an equity-neutral CB two weeks after its previous equity-neutral CB matured ... We’re playing on scarcity and if you want to be exposed to Iberdrola, the only way is to participate in the new issue."
Even so, global coordinators Barclays and Goldman Sachs had been waiting three weeks to launch the offer into the right market. The wait was worth it as the five-year issue was upsized from €400m at launch. The bonds will pay a coupon of 0.8% and came with a fixed premium of 20%.
A banker on the transaction said "in a world of higher rates and higher cost of debt, issuers are trying to tap any pocket of demand to reduce the cost of debt".
Pollan said equity-neutrals might be the way to bring some investment-grade names to the structured equity market. But he said such deals only work in some circumstances. "The whole purpose of non-dilutives is to create an arbitrage versus straight bonds, so if the convert plus hedge costs more than issuing a senior bond it doesn’t make sense,” he said.
Petit said recent redemptions meant there was cash to be redeployed on new issues, helped by strong current appetite for the energy sector in particular. “That is why the equity-neutral market could reopen for some issuers but not all,” he said. “I think investors will probably be more selective than they were five years ago.”
Opportunity knocks
Increased long-only participation in equity-linked deals has provided an opportunity on both pricing and structure, with bankers saying that the majority of interest for Iberdrola came from outright investors.
Equity-linked bankers have been talking up the rise in rates and increased volatility as the perfect backdrop for the product all year. As the cost of debt has spiralled and some debt markets have been shut, issuers have lately turned to equity-linked.
There are more NDCB redemptions to come as many of those printed in 2018 came with five-year tenors.
“If the likes of Vinci, BP and Telefonica that did equity-neutral deals a few years ago were to tap this market again next year, I think investors would love it,” said Petit.
Barclays and Goldman Sachs were joint bookrunners with Credit Suisse and Mizuho.