| New issuance of European convertibles in 2006 initially kicked off to a fairly slow start, although by March there were signs of a pick-up (along with healthier performance figures by convertible bond hedge funds). Mandatory deals and Swiss issues were boosting the deal flow, which was characterised by a high degree of structural variety (see below). The historically low levels of volatility in the first five months of 2006 had left investors disinclined to pay a hefty premium for the embedded optionality. In late May, the markets slid and European convertibles new issuance dried up again. Then in June and July both new issuance and vvolatility picked up.
THE HYBRID CHALLENGE In March 2006 Hungarian oil group Mol Hungarian Oil and Gas announced plans to issue, via Morgan Stanley, €690m of hybrid bonds exchangeable after 5-10 years into 6m Mol shares currently held in Treasury. The bond was issued through the vehicle of its BB rated Jersey-registered SPV, Magnolia, (in a deal mirroring that of TUI last year). The bonds are callable after 10 years and the deal was what the Financial Times calls the “holy grail”, an instrument that “looks like debt to its issuer, the tax man and investors but like equity to credit rating agencies and regulators” and complying with Basel II equity treatment. Such bonds can finance equity buybacks without denting credit ratings. In Europe (unlike the US), perpetuals can be tax-deductible. The hybrid secured “basket D” treatment from Moody’s (and followed closely by other agencies), means that three-quarters of the hybrid issue is categorised as equity rather than debt for rating purposes. These structures in their various forms may save a point or so in the company’s cost of capital; but the FT, though, has drawn attention to the volatility of hybrids – the non-cumulative Thomson bond fell 20pct coincidental to a profits warning, while the Linde bond underperformed the senior bonds by 20pct on the bid for BOC.
FRENCH ISSUES On 15 February STMicroelectronics' announced a $927m 0% senior convertible 10 year bond on a 1.5% YTM, callable subject to a 130% accreting hurdle after 5 years, and puttable at an accreted value after 5, 6 and 8 years. This unusual investment grade tech issue was launched on just a 30pct premium to the NYSE share price and was launched with a $47m Greenshoe option. The proceeds were expected to come in handy if an earlier 0% CB due 2013 was significantly put for redemption in early August 2006.
In the French sector, March also saw a pre-emptive issue of €156m of subordinated convertible bonds for Belvedere, the drinks company, with €92.5m being taken up by CLF. This issue, together with some senior debt put Belvedere (then capitalised at €339m) in a position to acquire fellow drinks company Marie Brizard et Roger International, which was capitalised at €465m.
Shortly afterwards Sonata Securities issued an unusual floating-rate (3m Eurolibor +120bp) €350m exchangeable into France Télécom (where the redemption is linked to the repayment of the subordinated perpetual convertible of France Télécom issued in 2003). The premium was 47% and there is a 150pct call trigger operative after 4 years, plus numerous specific small-print features, some credit related.
In early July 2006 Artémis launched the biggest French exchangeable for nearly 2 years, a 5-year 2% exchangeable 2011. The bond exercises into PPR shares (non ring-fenced in any default) for EUR900m pre-Greenshoe (upping it from EUR800m). The proceeds are to be used refinance the out-of-the-money EUR1.2bn exchangeable due 2007, which the subject of a CONV.BIZ prospectus audit. The new issue is callable after 3 years subject to a 125% accreting hurdle. It was priced on a 27% premium (27-32% indicated) and 5.75% YTM (5.25-5.75%). Subject to a 4% yield trigger, there is dividend protection over a 3.5% hurdle.
French broadband supplier Iliad upped its deal size from EUR250m to an eventual EUR330.6m. One perceived attraction of this issue was the strong change of control covenant. The coupon was 2.2% (2.2-2.7% indicated) while the premium was 37% (32-37% indicated). There is a call after 3 years, subject to a 130% hurdle. The deal was launched on 21 June 2006.
French cable-maker Nexans (whose first OCEANE was subject to a CONV.BIZ prospectus audit) launched a EUR212m six and a half year deal due January 2013 on 29 June 2006. The coupon was 1.5% and the YTM was fixed at 3.75% (range 3.5-4%).The premium was 35% (range 30-35%).
SWISS ISSUES. A feature of recent months has be a flow of Swiss issues, this market often being a law unto itself. Before Christmas there was the CHF767m Sonata Securities/Adecco 1.5% 2010, exchangeable into 10.2m Adecco shares and collateralised by CEO Klaus Jacobs' family's 32m share stake. Swiss Re recently launched a CHF1bn mandatory, due 2008, with a CHF300m Greenshoe option; and the last CB issue before Christmas was the issue of an unusual partially mandatory Swiss Franc issue for BB Biotech, whose successful launch may have provided encouragement for the structure of subsequent BB Medtech launch, a modestly sized CHF150m) 3 year partly-mandatory deal in February 2006. Then in March 2006 there was a SF115m 7-year 1.5% deal for Swiss banking software group Temenos, launched on a 40% premium and 3.5% Y.T.M.
This was followed b a more substantial CHF600m 7-year 1.7% senior unsecured deal for Pargesa Netherlands BV due April 2013, “convertible” into new registered shares of the guarantor parent, Pargesa Holdings. Pargesa holds 48% of GBL and has indirect majority control of Emerys and smaller stakes in Bertelsmann, Suez, Total and Lafarge. This convertible was launched to subscribe for pre-emption rights on GBL’s EUR709m capital increase. The bond is callable after 3 years on a 130% hurdle and issued on a 27.5% premium (25-30% indicated). The coupon was fixed low at 1.7% (below the indicated share yield of 1.8%), and against coupon indications of 1.625-2%. The pricing was at a premium to mathematical theoretical calculation and may have by helped by the perceived scarcity value of vanilla-structured new issues in Switzerland. The hurdle on dividend protection rises by 8% a year from a base level of CHF2.16 for the financial year 2005. On a takeover, there is either an investor par put or conversion, and in both cases investors receive a make-whole amount representing the difference between the value of the shares and par plus accrued interest. There is also a conditional put on a restructuring. BNP Paribas owns 14.7% of Pargesa.
On 11 April the Swiss cantonal bank Graubünder Kantonalbank launched an eight-year CHF240m CB due 2014, callable after 3 years subject to a 130% hurdle. The coupon was 2% (2-2.5% indicated) while the premium was 27% (22-27% indicated).
Swiss Property firm, AllReal Holding launched a modest CHF150m 4-year 1.875% convertible in late May 2006. The premium at issue was 15% to the CHF130 reference price.
OTHER NEW ISSUES In February there was a EUR200m deal for the Dutch property company Wereldhave, (known to the UK domestic convertibles investors as the buyer of English Property Corporation).
In late March there was a now-unusual sterling-denominated deal, a £80m 3.8755 convertible due 2011 for Pipex Communications, callable after just 3 years. This issue was priced on a 25.8% premium and the funding was for the Homecall acquisition.
The $250m 4.5% Soco International CB 2013 (puttable after 4 years) was priced against an indicated coupon of 4.5-5% and premium was at the high end of the 37-42% indicated range. It is callable after 4 years, subject to a 130% hurdle. The deal was launched on 2 May 2006 to finance the development of its Vietnamese exploration interests.
The Norwegian offshore contractor, Subsea 7 launched a $300m 2.8% convertible 2011 (upped from $200m) on 3 May on a 42% premium. There is a 150% hurdle after 3 years.
Qiagen came in with a $300m 20-year deal on 9 May 2006, just before new issuance dried up in Europe in the shake-out. The coupon is 3.25% (3.125-3.625% indicated) and the premium was 33.4% (30-35% indicated). The deal is puttable in years 7, 11 and 16 and callable after 7 years subject to a 130% hurdle.
MANDATORIES The Swiss market has seen a number of mandatories in 2006. (See above). However, in March Germany’s Bayer launched a [€2bn] 3-year 6.625% mandatory convertible (indicated range 6.25-6.75%), led by Citigroup and Credit Suisse, to refinance the acquisition of Schering. It is subordinated even to Bayer’s hybrid bonds. Mandatory conversion is on 1 June 2009. At issue, the minimum conversion price was €33.03 for a 17% premium (range 16-20%), while the maximum conversion price was €38.64. From June 2006, the bond is unconditionally callable at the minimum conversion price, subject to a make-whole payment equalling the residual coupon payments (including any deferred payments – interest may be deferred if Bayer has not paid OR declared a dividend 3 months prior to a coupon payment). Unusually, there is a feature to adjust the conversion ratio to 105% of the 2007 dividend if the 2008 dividend has not been declared by maturity, and accelerated conversion if Bayer’s rating falls below Ba2/BB. An average “takeover conversion ratio” is calculated from 5 daily conversion ratios. This issue for Bayer was the biggest convertible offering in Europe since Siemens’ EUR2.5bn CB in 2003.
Earlier, UBS meanwhile launched a $250-300m three-year mandatory exchangeable (initially indicated coupon 9.5 %-10.5%) into Russian steelmaker Mechel, simultaneously with a $700m GDR issue. The conversion price was indicated to be 100-140pct of the GDR sale price. Callability begins after just one year, subject to a matrix make-whole formula, plus the payment of discounted interest if the entire issue is called.
FOOTNOTE. Malta’s International Hotel Investments plc is seeking a listing on an exchange outside Malta, which should raise the profile of the structurally innovative 5% convertible 2010.
July 2006
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