Equity-linked: New Year needs new resolutions
China Petrochemical Development Corp (CPDC) issued a convertible bond last week that was backed by not one but two SBLCs — allowing the company to join a very small list of issuers that have used unusual structures this year to pull off successful deals. The success of transactions with new features this year shows Asia needs more innovation if it wants to develop its equity-linked market
On the surface, it’s been a good year for Asian structured equity. Volumes have certainly been positive. So far this year, issuers from Asia ex-Japan ex-onshore China have collectively raised $14bn via 129 deals, according to Dealogic, about the same as last year. But what has been lacking is much attempt to innovate, with just a handful of deals breaking away from the norm.
When Chinese internet security provider Qihoo 360 Technology raised $1.035bn in August, it was with a dual tranche structured CB that pushed the boundaries on maturities. The company opted for six put three and seven put five tenors — a step away from the Asian norm of five put three maturities.
TAL Education, in May, used a call spread overlay on its $200m issuance — also a novel feature for Asian CBs that effectively allows issuers to increase their conversion premiums. Meanwhile, Trina Solar executed its $247m fundraising via a simultaneous placement and a CB.
While these are a few examples, they reflect the potential of Asia’s equity-linked market. Sure, sticking to tried and tested approaches ensures strong delivery. But for the market to really develop, bankers need to capitalise on their structuring ability to bring new and rare issuers into convertible bonds. And that will often mean pushing innovative structures.
The advantages are manifold. Equity-linked bankers are always clamouring for more deals and with interest rates expected to rise in the middle of next year, more issuers are likely to be seeking alternatives to straight debt. With some novel thinking, more issuers could meet their fundraising targets through CBs while also allowing investors to get their hands on a greater variety of credit exposure. And of course, bankers get to watch their P&L rise.
Take for example Hong Kong-listed China Yongda Automobiles Services, which raised Rmb1bn ($161m) in June via a CB that had an SBLC provided by DBS. Soon after that, in July, Taiwanese solar cell maker Neo Solar Power Corppriced a NT$3.6bn ($120m) CB backed by an SBLC from ING.
Both deals got a warm reception from investors. And because issuers from the automobile and solar sectors were pretty infrequent, the trades gave investors a chance to diversify. But that wasn’t all. The use of the SBLCs helped providing security to investors concerned by the issuers’ industry of operations.
That was also the case with Taiwan-listed CPDC, which netted $132m from a zero coupon CB last week that had SBLCs from two local Taiwanese banks — CTBC Bank (A2/A-/A) and Taiwan Cooperative Bank (A-). CPDC was loss-making and the only way it could tap investors was with some strong backing from better rated names.
Using SBLCs to bring challenging credits to the market is one way equity-linked bankers can mitigate risks for investors by spicing up the deal. But even with IG names, bankers should use their thinking caps more.
For a start, issuers and banks need to rethink their cosy acceptance of five non call three structures, especially as there is evidence that investors will welcome longer maturities. Dual tranchers might also be widely accepted, as Qihoo’s deal showed, and it should be something banks try to replicate more.
If the issuer’s main objective is to raise funds, then banks should not hesitate to use asset swap on deals that would otherwise struggle. Asset swap has played a big role this year in taking deals past the finish line, and can come in handy when wooing potential issuers to the equity-linked market.
So as the year draws to a close and the focus turns towards 2015, equity-linked bankers could do worse than put innovation on their list of New Year resolutions.