GS Engineering & Construction, commonly known as GS E&C, has opted to refinance a dollar-denominated convertible in the domestic bond market where it can achieve a cheaper cost of funds than the international market.
The Korean civil engineering company’s decision underlines just how moribund conditions are in the international convertible bond market where there have been only 14 equity-linked deals from Asia ex-Japan in the first three-months of this year according to Dealogic.
This represents the lowest fundraising volume since 2010 and issuance has also been highly concentrated, with 80% of the total emanating from deals by Chinese railway duo CRRC and CRCC.
Bankers predict the dry spell will continue into the second quarter, exacerbated by low redemptions, which are limiting cash inflows.
Sales desks estimate redemptions will total less than $500 million between April and June. The largest redemption will come from Asia Cement’s $172.5 million bond due June 7.
However, they are more optimistic about the third and fourth quarters provided market conditions remain stable. Bond redemption schedules show roughly $5.9 billion will come due this year, according to one banker. Deduct the approximately $1.4 billion worth of issuance during the first quarter and that leaves as much as $4.6 billion worth of capital to be deployed over the rest of the year.
Potential deals include a $1.5 billion equity-linked offering from China Railway Group, which was approved late last year, as well as a $400 million issue from Asia Cement and $125 million from Gigasolar.
Building onshore demand
In the meantime, GS E&C will issue up to W250 billion ($218 million) via a five-year deal. Terms include a 2.9% coupon and a W29,471 conversion price.
This represents a 14% premium to the last close when the deal was announced on Friday, and 12.7% premium to the stock’s W26,150 close on Monday. There is also an investor put option in year-three.
Lead managers are NH Investment & Securities and LIG Investment & Securities.
Seoul-headquartered GS E&C redeemed its debut $100 million overseas convertible in January this year. The previous deal, led by JP Morgan in 2014, had a higher conversion premium of 20%, although this was partially offset by a higher coupon of 3.25%.
The five-year deal came at a time when the stock appeared to be stabilising after progressively losing roughly 75% of its value since 2011 when it had been trading around the W118,380 mark. The JP Morgan issue never hit its conversion price of W43,560.
One CB specialist said the company would not have been able to get the same terms offshore as it has onshore this time round. Firstly, its credit is not that well known and secondly, international investors typically request more generous terms to participate in local currency bonds because of the extra costs to hedge their foreign exchange positions.
A local currency bond is also more favourable to issuers because they can minimise FX risks, although GS E&C has a large overseas portfolio to fund.
The last Korean won-denominated bond issued overseas was Lotte Shopping’s $303 million exchangeable into Lotte Himart in 2013, which had dollar settlement.
Heightened default risk
Asia ex-Japan equity-linked specialists have lost yet another potential small- and mid-cap issuer to the issuer’s domestic market.
However, investor confidence is not running that high given the number of companies, which have recently failed to settle their bonds.
Last month, Chinese lottery company, Rexlot Holdings, announced it a potential default on its HK$817 million ($85 million) convertible bond due September 2016. In order to repay the debt, the company has entered into an agreement to sell its lottery ticket design and printing subsidiary, but the transaction has been delayed pending government approvals.
In a separate case, Hong Kong-listed Up Energy Development defaulted on a $125 million convertible bond in January.
Earlier this month, this was followed by China Green, which announced it does not have sufficient offshore funds to settle an Rmb515 million ($80 million) convertible note due Tuesday.
