Credit Suisse and Morgan Stanley cracked open the convertible market last night with a complete rarity – an accelerated bookbuild of bonds. The trade saw First Reserve offer all of its US$800m principal December 2014 5% Glencore convertible bonds. The pre-IPO issue was a benchmark US$2.3bn, but was placed with just a handful of accounts in December 2009 and any paper has been hard to come by.
While investor appetite has been relatively strong – compared to issuer desire – this year, after a tough August this is a notable test of demand with a size of well over US$1bn at the offer price. Last night progress was sufficient to expect the book to close and price overnight with allocations this morning.
Bonds were offered, on a Reg S basis, at 133.6—136.6 to give a deal size of US$1.07bn–$1.09bn as the seller sought to monetise the coupons and option value of bonds that mature in December 2014 (though there is a call from November 2012 at 150%). Surprisingly the energy-focused private equity firm ploughed proceeds back into Glencore equity to maintain the same exposure.
Underlying the US$800m bonds were 141m shares. Investors last night bought on the basis of a compulsory delta of 75% which allowed First Reserve to secure 106m shares in Glencore, with a reverse bookbuild by the two banks after yesterday’s close to secure the remaining 35m. The stock was purchased at a fixed 425p (US$6.78), which provided the reference for the delta and was a 4.7% premium to the close.
With parity of 118.9 and First Reserve keen to secure an equity stake in Glencore, the move to switch provides the company with 14.7% at the bottom of the range in exchange for the option value and coupons.
The deal should also provide a welcome boost for the Glencore story with an investor with AUM of around US$10bn keen to maintain such a large exposure to the commodities firm.
UPDATE:
Pricing came at 134.3% of face value last night so total proceeds from the sale of bonds were US$1.074bn, with US$956m reinvested into maintaining the 141m share exposure. First Reserve has given up the coupons, optionality and, most significantly, its downside protection for US$118.4m.
Shares are up strongly this morning at 427.55p at 11am BST having been as high as 432.9p. Part of the reason is that last night’s trade appealed to hedge funds (because of the enforced delta), but outright accounts are interested in the bonds now that they are not so in the money as they once were. This morning has seen hedge funds sell bonds a couple of points up from where they bought last night, leaving them with a short position to cover this morning.
