Structured Equity House: Goldman Sachs

Forward thinking

In a bumper year for equity-linked issuance in Asia, one bank stood out for its ability to deliver big deals for key clients. For its focus on repeat issuance and its capacity for innovation, Goldman Sachs is IFR Asia’s Structured Equity House of the Year.

Goldman Sachs was quick to recognise the growing importance of equity-linked financings to Asian issuers in 2019 – and put its structuring expertise to good use with a range of big deals across multiple markets.

International equity-linked issuance from Asia Pacific ex Japan reached US$12.6bn during IFR’s review period, up 34% from a year earlier, according to Refinitiv data. Goldman topped the league table with a 25% market share, raising US$3.2bn from 10 transactions.

“Repeat issuance is one of the themes of 2019. For the first time Asia is really on the global stage as a capital raising environment, not just a series of one-off, individual deals. The convertible bond market is a big piece of that shift,” said Aaron Arth, head of Financing Group, Asia ex-Japan at Goldman Sachs.

“The equity-linked market started to evolve in 2018. We have been building that business as we could see this trend coming, and it really began to drive the business,” he said.

The surge in overall volume was mainly a result of sizable issues from US-listed Asian tech companies, many of which had fallen short of their targets when they listed in 2018 in challenging market conditions. For young companies in need of growth capital, but without a credit rating or track record of profits, convertible bonds can be an attractive alternative.

Goldman was quick to spot the market trend, arranging seven of the 10 CBs from US-listed Asian tech issuers during IFR’s review period.

The US bank, for instance, led two CB sales for iQiyi, after working as one of the bookrunners on the US$2.4bn Nasdaq IPO of China’s Netflix-like video platform in March 2018.

Eight months after listing, iQiyi sold a debut US$750m five-year put-three CB in November 2018. In a surprise move, the company revisited the structured equity market in March again with a much bigger deal – a US$1.2bn CB, the largest-ever CB offering from a US-listed Asian issuer.

The second CB, with a six-year put-four tenor, helped iQiyi fund its rapid growth while at the same time allowing the company to stagger its debt maturity profile over time.

Other highlights during the year included a US$750m CB for Chinese electric car maker Nio and a US$1bn dual-tranche CB for social media giant YY.

Goldman’s dominance in the tech sector was impressive, but its thirst for innovation differentiated it from other competitors.

While all ADR CBs over the past few years were non-callable for life, Goldman introduced an issuer call for Chinese e-commerce company Pinduoduo’s US$1bn CB in September and added the same feature to the US$1.15bn CB of South-East Asian e-commerce company Sea in November. Both deals were callable after around three years, subject to the shares trading at 130% of the conversion price, giving the issuers more flexibility in managing their balance sheets.

The Sea deal, solely arranged by Goldman, was particularly impressive as it achieved the highest CB conversion premium in Asia Pacific ex-Japan in 2019 at 42.5% before the capped call transaction.

A capped call, or call spread overlay, involves the company purchasing a call option with a strike price equal to the initial CB conversion price at the same time as it sells a call option to counterparties at a higher strike price, effectively pushing up the price at which it will sell new stock.

While it is a common feature in the US CB market, Goldman tested the concept in Asia Pacific when New Zealand cloud-based accounting software company Xero sold a US$300m CB in October 2018.

Following on from that experience, Goldman, as one of two joint global coordinators, thought outside of the box when it helped Hong Kong-listed Country Garden refinance a 363-day CB in November 2018. The Chinese property developer needed the money, but a low share price at the time made it reluctant to sell another CB at that level. Goldman overcame regulatory and accounting hurdles in Hong Kong to include a call spread option, the first of its kind in the city, in the HK$7.83bn (US$1bn) CB, pushing up the conversion premium from 30% to an effective 85%.

Goldman was also active in raising funds for pharmaceutical companies, another hot sector during the year. It helped Luye Pharma and Wuxi AppTec each raise US$300m from CBs.

Goldman, through its securities joint venture Goldman Sachs Gao Hua Securities, was also the most active foreign player in China’s domestic CB market, arranging a giant Rmb40bn (US$5.69bn) CB for China Citic Bank and a Rmb26bn CB for Ping An Bank.