Oil-linked Technip sells €375m equity-neutral CB on awful day
Technip, the French oilfield engineering company, raised €375m on Wednesday with a daring equity-neutral convertible bond — the first such deal since Total’s transaction in November.
The cash-settled five year bond was priced at the worst end of terms for the issuer, but still achieved a 40% conversion premium and coupon of 0.875%, with no risk of dilution. The company has hedged the risk of having to pay investors equity upside if the bond converts by buying a call option from banks.
Proceeds will be used for general purposes and to buy the call options, but on January 1, Technip redeemed in full a €550m CB issued in November 2010 that failed to reach its conversion price.
BNP Paribas and Crédit Agricole were global coordinators on Wednesday’s deal, Deutsche Bank and Société Générale bookrunners.
Remarkably, the issue was done on a dire day for stockmarkets, when the Euro Stoxx 50 fell right from the open, and closed 3.3% down. “It was audacious,” said a banker away from the deal. “I’ve never seen an issue come to market with the market being that bad.”
Even equity-linked investors — usually hardy types — were on Wednesday beginning to feel the pain of the wider sell-off for the first time, he said. “Sentiment yesterday was really poor,” he said. “Investors really were nervous.”
A banker on the deal said that because the deal was equity-neutral, Technip had been “less sensitive to a bad day in the market than they would have been if it were a normal CB.” From one point of view, a weak share price actually made the deal more attractive to investors.
Furthermore, the leads had “solid interest from presounding, big orders from good accounts, and we felt the market was in decent shape from the point of view of what CB investors wanted to do,” he said. Technip was a “very good name, very well known and a repeat issuer, coming with a reasonable structure.”
The deal was launched at a size of about €375m with a premium range of 40% to 45% and coupon range of 0.125% to 0.875%.
It was covered in about 75 minutes and priced and allocated by 2.30pm Paris time.
“It went alright, it went well, in the context of the sector,” said another banker on the deal. “The book was very comfortable.”
Asked whether the issuer was disappointed to have priced at the wide end, he said: “When you consider what the markets looked like, it was great even just to get it done.”
The investors were a mix of hedge funds and long-only investors, he said. “There is a lot of cash in the converts world,” he added. “And the bond market is a little more complicated for this sector. Convertible bonds are better for issuers when the markets are tough.”
He compared the deal with ArcelorMittal’s €1.25bn issue in 2009 of the first CB since the fall of Lehman Brothers, which “flew off the shelf” at attractive terms for the issuer, when a normal bond would have required “a huge coupon”.
The purpose of recent equity-neutral CBs by issuers such as Vodafone, National Grid, Iberdrola and Total SA has been to issue bonds that to the issuers were essentially straight debt, more cheaply than a plain vanilla bond. CB coupons are much lower than those on straight bonds, and in present markets, the issuer can come out ahead even after spending much of the yield difference to pay for the call option to hedge its equity exposure.
One lead banker said it was difficult to say whether Technip had saved money, since straight bond markets were difficult to read at present. “Usually on those structures you are not saving 1%, you are saving 20bp-30bp, so it’s a fine line,” he said.
Iberdrola saved 50bp-60bp on its deal, also prompted by a nervous mainstream bond market, a banker said at the time.
Certainly, this deal enabled Technip to avoid a tricky European straight bond market, where there has been no public issuance for eight days, let alone from an oil sector company.
Technip’s share price fell 5.7% on Wednesday, to €36.125, taking it to 46% below its high for the year last April. But on Thursday, when the wider market recovered by 2%, Technip bounced up 7.8%, perhaps because of unusual trading flows caused by the deal, or perhaps because investors were pleased it had raised some money.
Technip is rated BBB+ from Standard & Poor’s with a stable outlook but the leads used a credit spread of 260bp, according to the banker away from the deal.
He thought that gave implied volatility of 29%, inside his estimate of 30% to 32% for historic vol, though on recent numbers, historic was 42%.
The credit spread used was quite wide, compared with Technip’s credit default swap spread of 195bp on Wednesday, up from 147bp on January 4 and 137bp at the end of last year, the banker said.
But the company has a €125m bond due 2023 that was quoted on screens at a yield of about 2.8% on Wednesday. The five year point on its curve might have been as much as 20bp lower, but a new five year straight issue from a company in the oil sector might easily have needed 50bp of new issue premium in present conditions, suggesting a straight bond might have cost it something like 3.1%.
With the five year swap spread at 0.18%, that would imply a credit spread of 292bp, meaning the 260bp assumption was not so generous after all. Compared with a straight issue at 3.1%, a CB at 0.875% would have given Technip 222.5bp to pay for the option.
The banker away from the deal said there was plenty of stock borrow available and used an assumption of 40bp for that.
He made the theoretical price 101.65, implying the bond’s par offer price was a slight discount to fair value.
Technip issued CBs in 2002, 2007, 2010 and 2011.
As is usual with equity-neutral deals, the conversion price will be set over the volume-weighted average price over the 10 days following the issue — the period during which the hedging banks will lay off their own positions by buying stock.
The banker away from the deal also pointed out that Technip was offering dividend protection above a dividend of €1.25, though the current expected dividend is €2 a share.