The Philippines’ SM Investment Corp showed the kind of CBs that are sellable in current markets in pricing a straight-forward deal with an uncomplicated structure in February. Although modestly sized, the trade has generated optimism and more South-East Asian issuers may look at the equity-linked market this year.
Source: Reuters/Crack Palinggi
Indonesian men try to grab bicycles and other prizes hung on top of greased poles in Jakarta
The Asian CB market overall has a spring in its step with two Taiwan deals being done smoothly early in the year, but the SM Investment Corp CB was particularly significant as it showed that issuers from South-East Asia also want to be active in this market.
The fact that the region’s economies are resilient and investors are keen to build exposure to South-East Asian companies is expected to help volumes. Equity-linked supply from South-East Asia is usually about 10%–15% of total issuance from Asia ex-Japan, but bankers are betting this proportion will rise in the current year.
This optimism is primarily because the region’s secondary equity markets have performed better so far this year as foreign investors look to take advantage of low valuations. So, issuers are keen to raise equity and CBs allow issuers to realise their expectations of potential growth in a stock.
“The 2012 outlook for South-East Asian convertibles is extremely strong,” said Aloke Gupte, head of Asia Pacific equity-linked at JP Morgan. “Equity markets are robust with investors viewing South-East Asia positively, while credit markets are stable and issuers in the region are well positioned be it investment grade or high yield. The current environment, therefore, has all the ingredients needed for an active CB market.”
“The relative scarcity of South-East Asian deals should make them attractive to investors. We fully expect regional issuance to cross volumes seen in 2011, when, despite a strong start, volatility and macroeconomic uncertainty caused a drop in primary deals in the second half of that year. This is a record year for redemptions pan Asia, which means that a large amount of liquidity will go back into the market – something that should aid new issuance,” Gupte added.
Nick Smith, head of convertible bond origination Asia Pacific at Barclays Capital, agreed, saying: “CBs as a product are likely to be popular with issuers this year. Asian economies as such are expected to be resilient amidst the current crisis so there will be investor interest to build exposure into the region and CBs allows both issuers and investors to take advantage of any upside while giving downside protection.”
Most bankers expect supply to originate from beta markets, such as Indonesia, which has got a fillip from international rating agencies promoting it to investment-grade. Issuers from Singapore and Malaysia may also dip their toes in the water in the near to medium term with many companies already in advanced talks with bankers.
There may a number of CBs from the South East Asia region this year with beta markets like Indonesia, Singapore and Malaysia and to an extent Vietnam being possible sources of supply,” said Barclays’ Smith.
The only challenge issuers are likely to face is investors not buying everything, wanting only top issuers or companies with strong growth potential. Investors also generally want an upfront coupon-paying structure.
As such, SMIC’s deal in February was significant because, unlike the first two Taiwan CBs from Asia this year, the Philippines company priced a US$250m five-year put-three that was not hedgeable, but was structured to please outright investors.
SMIC, which is involved in retailing, mall operations, banking and property development, last issued a CB in 2007. Its aim was to raise funds through an attractive, low-cost financing, while achieving a conversion price at a premium to the current share price. It did so with this transaction.
In order to meet this objective, the CB carried a premium redemption structure. So, in addition to an upfront coupon, there was also a yield being paid on the put date or maturity. This appealed to outright investors and allowed the issuer to achieve an expected conversion premium.
The CBs were marketed at a coupon range of 0.625%–1.625% and a yield-to-put or maturity of 1.875%–2.875%. The conversion premium range was 20%–30% over the February 2 close of Ps651.205. The investor-friendly ends were set with coupon at 1.625%, YTM at 2.875% and conversion premium at 20% for a conversion price of Ps781.446.
The credit-spread assumption was 350bp over Libor, while the historical volatility was 33%–34% for an implied volatility of 20% and bond floor of 95. Most investors were outrights, while only a few hedge funds participated because hedging the equity portion or the debt portion is difficult in Philippines deals. The bonds were quoted around 100.25 in secondary a day after the deal was done, but it was last quoting at 99.25.
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