MKS Instruments raised US$1.4bn last week from an upsized convertible bond offering, continuing the trend of highly rated companies employing CBs as lower-cost term debt.
The offering marked the chip packaging and industrial equipment testing company's debut bond issue after previously relying exclusively on bank loans to fund acquisitions.
JP Morgan, Morgan Stanley, Bank of America and Mizuho Securities upsized the offering on Monday to US$1.2bn from US$1bn priced at a 1.25% coupon and 30% conversion premium, toward the aggressive ends of 1.25%–1.75% and 27.5%–32.5% talk. The banks fully exercised their greenshoe late in the week to increase the deal to US$1.4bn.
More than 150 institutional investors participated, bankers involved told IFR.
“We saw a lot of demand from outright, long-only investors,” said one banker. “While the stock price did get hit, this was a large financing relative to the market cap [of US$8.2bn].
"Generally, we only upsize a deal when there is strong support from long-onlys."
MKS, rated Ba1/BB, used US$1.2bn of the proceeds to pay down a portion of its US$4.9bn bank debt. The company, which reworked those facilities to loosen indentures, pays SOFR plus 250bp on those borrowings, or about 7.8%.
In marketing the CB, the banks guided accounts towards the same 250bp credit spread and 40 implied vol on the underlying shares.
MKS also spent US$167.4m on a capped call to offset dilution from conversion of the CB up to a share price of US$237.42, double the reference price. That is above an all-time high of US$199.44 in 2021 so the CB could be seen as straight debt with effectively no dilution.
After falling 9% in Monday's session, MKS shares rebounded on Tuesday to US$123.10.
The company is shifting its funding mix after levering up to make a series of acquisitions, including the cash and stock purchases in 2021 of Atotech for US$7bn and Coherent for US$6bn.
"Historically, MKS preferred bank loans because of prepayability," said one capital markets adviser. "They wanted flexibility to repay borrowings and then relever when they wanted to make an acquisition.
"With the rise in interest rates, those loans have become prohibitively expensive. They needed to right-size the balance sheet."
S&P affirmed its BB rating on MKS, noting the refinancing was “credit neutral” but would be “modestly positive” for free cashflow generation. That meant a high-yield bond was an option, as was equity, though the combination of debt and equity in a convert is far lower cost than a high-yield bond and far less dilutive than equity.
Growing number
MKS is among a growing number of companies selling CBs as an alternative to straight debt.
After factoring in money spent on the capped call, MKS is paying an all-in cost of about 3.2%, according to IFR calculations.
Capped calls, whereby the CB's embedded call option is repurchased and warrants are sold at a higher strike price, are proving an attractive tool for fixed-income issuers to synthetically create a similar outcome to straight debt at a lower cost.
Of the 35 CBs sold in the US this year, 24 issuers have purchased capped calls and half those derivatives featured upper strikes at double the reference share price, according to IFR data. Meritage Homes, a split-rated (Ba1/BBB–) entry-level homebuilder, and Xerox (BB/Ba3) were among those to have made their CB debuts this year.
The costs savings are not insignificant. In the case of MKS, the savings work out about US$50m annually by refinancing bank debt (7.8%) with a CB and capped call (3.2%).