The last issuer to sell a convertible bond in the country was Cellumed Co, which raised $13m in December 2014, according to Dealogic. EBs have been a much rarer breed, with only two deals excluding Hyundai Heavy’s getting across the finish line since 2013.
Convertible bonds from Korea have been few and far between. There were only three last year that exceeded $100m — Doosan Engineering & Construction Co, Korea Gas Corp and GS Engineering & Construction Corp.
That scarcity was key to why Hyundai Heavy received such a blowout response when it opened books on its five year put three offering this week, via bookrunners Bank of America Merrill Lynch and HSBC.
The bond was exchangeable into 23.42m shares of Hyundai Merchant Marine Co. Fixed terms included a coupon and yield of zero, and issue and redemption at par. The leads marketed it at a conversion premium of 30.0%-37.5%, and an initial conversion price of W9,919-W10,491.
Korea Development Bank, rated Aa3/AA-/A+, sweetened the deal with a guarantee for the entire principal. Stock borrow, meanwhile, was provided by Hyundai Samho Heavy Industries Co for 10.48m Hyundai Merchant shares.
The issuer has a call option for the bond in year three, subject to a 130% hurdle. The exchangeable also has dividend protection, which ensures a full pass through of all dividends paid on the underlying shares.
Out of hand
The trade was launched at 4pm Hong Kong time and was covered within 20 minutes, said a source close to the situation. “The book was getting out of control at one stage and the leads had to cap orders at 10% one hour into bookbuilding or it would have blown out,” he said.
Investors were whipped into a frenzy once they saw that the exchangeable traded up to 101 in the grey market. “It was a free-for-all after that because people realised they could buy the deal at par in primary,” the source added.
When books closed at 6.45pm, the transaction was multiple times covered, with investors showing almost zero price sensitivity. More than 90 accounts participated, and the leads made a concerted effort to put the bonds in the right hands.
For Hyundai Heavy, that meant placing it out to mostly outright funds. “This was a quintessential hedge fund trade but we wanted it to trade well in secondary,” the source said. “So we took the trouble to allocate to as many outright funds as possible.”
As the leads aimed for a concentrated book, the top 20 investors bagged two-thirds of the deal. Asian investors bought 55%, European funds 40% and offshore US funds 5%. Many hedge funds were zeroed, even though they came into the book first.
The exchangeable was priced at the issuer-friendly end of 37.5% premium. “It sets the bar high bar for future issuance,” said the source. “The market has been dry because issuers are selective and investors need to see a good fundamental story and credit profile.”
As if it wasn’t enough of a triumph in primary, the bond then traded up to 103 in the aftermarket. “This deal had it all: a bank guarantee, stock borrow and reasonable terms,” the source said. “It was easy to understand, and investors lapped it up. It was a slam dunk trade.”
Underlying assumptions included a credit spread of 50bp, stock borrow cost of 1.5% and a bond floor of 95. Implied volatility was 26% versus input volatility of 30% and historic of 50%, giving investors another reason to buy.
Despite the premium on the EB being the highest since 2007 for a dollar-denominated Korean bond, investors were happy to buy, thanks to the fact that many CBs have been getting redeemed and investors were sitting on cash, said a Hong Kong-based equity-linked banker.
The guarantee was certainly a crowd-puller, said a banker away from the trade. The credit protection of a guarantee trumps that of a letter of credit, and while a letter of credit typically lasts up to the put option, the guarantee was for the full five years.
An equity-linked banker away from the deal said it was rare to see a CB trading up this much, but added that the scarcity of paper meant the bond may be pricing in that hunger from investors and trading above fair value.
Despite bearing the Hyundai nameplate, Hyundai Heavy and Hyundai Merchant are separate companies and had split a long time ago, said the source, which means chaebol crossholding issues do not arise.
“This was effectively a clean-up trade for Hyundai Heavy and it was marketed as such, with the firm selling down close to its entire 11.5% stake in Hyundai Merchant,” the source added.
Good benchmark
With the trade hitting a sweet spot bankers are wondering whether it reopens the market for Korean issuers, many of which have found the straight debt or equity markets more easy to understand.
“We now have something to flag up to issuers and say, ‘Look how well they did, you can do it too',” said a banker away from the transaction. “CBs have always been on the agenda for Korean issuers but they have reluctant to press play. The technical factors are supportive now.”
Korea’s central bank on June 11 cut interest rates by 25bp to a record low of 1.5%, a situation bankers see benefitting liquidity and the equity market. “If the stock market goes up, people will want to lock in low yields,” he said.
But while the source agreed that the Hyundai Heavy exchangeable made for a good reference point, each company has different needs. Many are mulling a return to the CB market, but it would be disingenuous to think the market is open for everyone, he reckoned.
The banker away from the deal reckoned the market for Korean issuers was never shut. “They have just been able to find cheap money elsewhere," he said. "Hyundai Heavy had some good timing as CB investors’ risk appetite is strong and this year’s CBs have mostly traded up.”
Several bankers also agreed that Korea, whose market is dominated by chaebol empires and their slew of cross-shareholdings, lends itself to exchangeable issuance. “Korea could be a chaebol play, but it’s hard to say if there will be a flurry of issuers,” said the equity-linked banker.
“People said the same thing about Lotte Shopping’s W334bn ($300m) EB for shares in Himart in 2013, but we haven’t seen many people going down the EB path since then.”