2016: Surviving global shocks

Global markets were repeatedly caught looking in the wrong direction throughout 2016, whether it was Britain’s referendum on Europe, negative rates in Japan, the rise of Donald Trump, or the cancellation of almost 90% of India’s banknotes.

Asia, however, could largely afford to ignore external shocks. Chinese outflows dominated every asset class as mainland buyers looked for an alternative to a declining renminbi and overseas acquisitions hit a record. Singapore managed to contain the fallout from a series of defaults, and even South Korea’s political crisis failed to dent dealmaking. And when China cooled outflows towards the end of the year, the Trump trade was sending markets to new heights.

IFR Asia 945 – June 4, 2016

SoftBank fires up equity-linked

Japan’s SoftBank last week sold the second-biggest equity-linked deal in the US capital markets when it raised US$6.6bn through a bond exchangeable into China’s Alibaba.

But the deal was not just big. It was also clever.

It needed to be because it was part of an effort to monetise one of the most profitable investments in corporate history. SoftBank first invested US$20m in Alibaba in 2000 and – having topped that up over subsequent years – was sitting on a stake worth more than US$60bn before this deal. That was equivalent to 90% of SoftBank’s market capitalisation and meant that capital gains tax planning was a major component of the financing.

SoftBank’s initial investment was so profitable that virtually the entire proceeds of last week’s sale would count as a capital gain – taxed at 30% in Japan.

To ease that burden, the deal was structured as a mandatory exchangeable trust security. The bonds convert into Alibaba stock in three years, like a typical mandatory. But unlike a typical mandatory, the underlying shares are held in trust and a forward delivery in three years can be settled in cash or stock, thereby allowing SoftBank to defer tax obligations, while retaining economic control.

The deal contains another structural wrinkle. The METS were sold under Rule 144A, avoiding the need to register the security with the US Securities and Exchange Commission. That was necessary because SoftBank is not an SEC registrant, although the METS trust is an SEC-registered investment adviser.

The US$3.4bn concurrent stock sale that took place alongside the MCB – US$2bn to Alibaba, US$1bn to two sovereign wealth funds and US$400m to the Alibaba Partnership – was also completed under Rule 144A, restricting their saleability for six months, but avoiding the need to register.

The transactions will reduce SoftBank’s stake in Alibaba from 32% to about 27%.

Alibaba controversially chose the NYSE for its record-setting US$25bn IPO in 2014 and, while its shares trade all around the world, accessing that liquidity was paramount to sourcing the large levels of investor demand needed for such a large transaction.

“We have been working on this for months,” said another banker involved. “We hit a window where we were able to execute.”

The deal took some time to come to its final shape. Joint books Deutsche Bank and Morgan Stanley, which had Mizuho Securities and Goldman Sachs as co-leads, had built a fully covered book by midday on Wednesday, and that provided flexibility to increase sizing from the US$5bn at launch.

Ultimately, the banks increased sizing to US$5.5bn and priced the deal at a 5.75% dividend and 17.5% conversion premium, the investor-friendly ends of talk. The US$1.1bn greenshoe was exercised on Friday, taking proceeds to US$6.6bn.

Shares of Alibaba, which have come under pressure recently on revelations that the SEC is investigating its accounting practices, fell 6.5% to US$76.69 on Wednesday when the deal was being marketed. The stock recovered by 0.9% to US$77.36 the next day, with the METS quoted at 100.35.

IFR Asia 958 – September 3, 2016

DBS pushes AT1 boundaries

DBS Group underlined its reputation last week as one of the world’s safest banks with a US dollar offering of Additional Tier 1 securities at the lowest coupon on record.

The US$750m issue, priced to yield just 3.6%, suggests that Asia’s bank capital market has room to tighten further as investors continue to turn to riskier debt to beat the global compression in yields.

This augurs well for other Asian issuers, such as State Bank of India, Woori Bank and Industrial Bank of Korea, expected to tap the AT1 market soon.

The Singapore lender priced the perpetual securities, callable after five years, 40bp inside initial guidance of around 4.0%. That smashed the previous mark of lower-rated Industrial and Commercial Bank of China (Asia), which sold US$1bn of perpetual non-call five AT1s at 4.25% in July. Those notes were trading at a yield-to-call of 4.2% at the time of marketing.

The DBS notes are expected to be rated A3/BBB (Moody’s/Fitch), four notches higher than those of ICBC Asia at Ba1 (Moody’s).

“The pricing is competitive, but technicals are really favourable,” said a banker with knowledge of the deal. “A lot of the AT1s have performed well and this transaction really took advantage of that.”

AT1 securities have grown in popularity over the summer, providing an issuance window for banks and some solace to yield-deprived investors.

European lenders, including Barclays, Standard Chartered and RBS, have enjoyed blowout responses to AT1s, although those notes offer much higher yields than the DBS paper. Barclays sold a US$1.5bn perpetual non-call 5.5 at 7.875% in August with expected ratings of Ba2/B+/BB+.

“DBS benefited from its higher ratings and rarity value,” he said. “You also have this mindset that these notes are probably some of the safest AT1s out there.”

The DBS transaction has standard point-of-non-viability features, but there is no hard CET1 trigger, while Barclays’ AT1s would convert into equity, if the CET1 ratio fell below 7%.

Although DBS may not enjoy as much state support as big Chinese banks, it is fundamentally stronger and could replenish capital by tapping existing shareholders, such as state investment holding company Temasek, according to a Creditsights report.

DBS was sole global coordinator and also joint bookrunner with Citigroup, Deutsche Bank, HSBC and Societe Generale.