APV, the Hungarian state holding agency, launched the country's first ever convertible bond on Tuesday when it sold a Eu639m bond exchangeable into the stock of eastern Europe's largest pharmaceutical company, Gedeon Richter.
The underlying shares comprise 25.04% of the company, which has its primary listing in Budapest.
Lead manager JP Morgan priced the five year bonds at par with a coupon at the bottom of the 1%-3% range, giving a yield to maturity of 3%, the middle of the range of 2.75%-3.25%.
The conversion premium was set at 54%, close to the top of the 50%-55% range. The bonds are non-convertible and non-callable until one week before maturity.
The bonds were sold to investors in two and a half hours. UK-based accounts bought 35% of the deal, US offshore buyers 25% and French funds 20%. The rest went to a mixture of other European accounts.
The bond was unusual in incorporating a European style call option, rather than the usual American style, which allows conversion at any point during the bonds' life.
According to a banker working on the deal, the bond is the first ever European exchangeable to use this type of call option. The lack of convertibility meant the bonds appealed more to outright and fixed income investors, less concerned about the call options.
?We see fixed income investors looking for a bit of an equity kicker as the main buyers of these bonds,? said a convertible bond analyst in London. ?The high conversion premium is also likely to reduce the appeal to hedge funds and increase the number of outright investors participating.?
The result of this was that despite a high stock borrow cost of 300bp, and the underlying shares equalling about 54 days' trading, only a small number of hedge funds bought the bonds.
But these factors were no obstacle to the deal's success. In early trading the bond was seen at 100.65. CB analysts said the price was unlikely to vary widely since most investors were buying the bonds to hold.
?Investors were attracted to the underlying equity story, and the Hungarian government's A minus rating,? said a banker at JP Morgan in London working on the deal. ?We provided clean market execution, and the bond will have a low running cost for the government.?
One area of possible worry for investors was the absence of takeover protection. Richter's large market share in eastern Europe is likely to prove tempting for Western pharmaceutical companies wanting access to the market.
The Hungarian government calmed these fears by saying it would not sell its 25% stake before the bonds mature. The banker working on the deal said the bond's high conversion premium might also dissuade would-be predators, by making it expensive to compensate the exchangeable bond investors.
JP Morgan won the mandate in July after a competitive bidding process between seven banks, run by APV. Morgan Stanley came second and Merrill Lynch third.
The bond continues JP Morgan's nearly unbroken run of European government privatisation exchangeable bond mandates.
After leading KfW's jumbo Eu5bn exchangeable into Deutsche Telekom last July, the bank has developed a near monopoly in leading issues for the Austrian and Swiss governments.