Asia-Pacific Structured Equity Issue: LG Chem’s US$2bn bond exchangeable into LG Energy Solution

IFR Awards 2023
3 min read
Fiona Lau, Sunny Tse

Proving value

South Korean chemical company LG Chem's record-setting US$2bn exchangeable bond showcased the depth of the equity-linked market and its value as an alternative fundraising channel amid rising interest rates.

LG Chem is an investment-grade issuer and a regular in the US dollar bond market, but had not visited the equity-linked market since 2018. As US dollar rates rose, an EB issue looked attractive.

The deal also offered LG Chem a way to potentially monetise a 1.57% stake in LG Energy Solution at a premium amid volatile markets, instead of selling the shares via a block trade at a wide discount.

The dual-tranche EB launched in July is the largest international EB ever in Asia-Pacific and the biggest equity-linked transaction from South Korea.

The deal comprised a US$1bn five-year put-two EB and a US$1bn seven-year put-four EB to smooth out LG Chem’s debt maturity. The two tranches targeted different investors creating price tension to maximise demand and improve pricing.

The 2028 tranche was marketed at a coupon of 0.75%–1.25% and an exchange premium of 25% to LG Energy’s closing price of W550,000 on July 11. It was priced at a 1.25% coupon.

The 2030 tranche was marketed with a coupon of 1.35%–1.85% and an exchange premium of 30%. It was priced at a 1.60% coupon.

The deal locked in a low financing cost for LG Chem compared with its straight bonds. For instance, the 1.25% coupon of the 2028 offered around 475bp annual savings compared with LG Chem’s US dollar bond due in July 2025 which then traded at close to 6% yield.

Investors liked the deal as it was a sizeable offering from a top-tier issuer that offered diversification from China, with a highly liquid underlying stock that is one of the world’s largest electric vehicle battery makers.

The EB drew tremendous demand, with investors from all over the world putting in more than US$10bn of orders during the five-hour bookbuilding.

The 2028 tranche attracted over US$6bn from 150 investors, with 30% being allocated to Asian investors, 28% to Europe and 42% to the US. The 2030 tranche drew over US$4bn from 130 investors, with 26% being allocated to Asian investors, 43% to Europe and 31% to the US.

To facilitate hedging for the deal and reduce the impact on LG Energy’s shares the next day, the leads also arranged a delta placement of about US$360m.

Shares in LG Chem closed down 0.2% at W653,000 on July 12, while LG Energy's shares dropped 2.9% to W534,000. The 2028 and 2030 EBs traded above their issue prices at 101.85–102.20 and 101.10–101.45 respectively.

Citigroup, Goldman Sachs and HSBC were the joint global coordinators.

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