Korean biopharmaceutical company Celltrion last night raised $300 million from a convertible bond to fund product development, raw materials costs and other working capital requirements. The company, which is listed on Kosdaq, doesn’t have any outstanding debt in the international markets and this was its debut CB.
The deal has a five-year maturity but can be put back to the company at par on the third anniversary. Like other Korean CBs it has a delayed conversion period, but instead of the 12-month delay that is required by regulators, the Celltrion CB cannot be converted until 18 months into the life of the bond.
A source noted that the company wanted this partly because it expects to gain approval in Europe and in more emerging markets for some of its drugs in 2013 and 2014 and doesn’t want dilution of its share capital during this period if the share price gains sharply as a result.
Supposedly there was little push-back from investors on this as the majority of the demand came from outright investors who were taking a long-term view of the company anyway. Some CB-focused hedge funds did come into the transaction, but there is no stock borrow or asset swaps available in the name so they too took a mostly outright view.
There is an issuer call after three years, subject to a 125% hurdle.
Investors also seemed comfortable with the marketed credit spread of about 350 to 400bp over Libor, even though this was significantly more aggressive than the 600bp to 700bp spread that the big biopharmaceutical companies in the US are trading at. However, Korean CBs and exchangeables tend to trade very tight and even if the credit assumption for Celltrion didn’t match larger companies such as KCC, Hyundai Heavy or Hyundai Motors, which trade at about 250bp to 300bp, it was adjusted to account for the tighter levels in the overall Korean market.
Overall, the deal attracted some 50 investors with about 75% of the demand coming from outright accounts, the source said. As a result, the order book was also very European-heavy. This was a Reg-S deal, but a few US investors did participate through offshore entities. The source estimated that about 70% of the demand came from Europe, 25% from Asia and 5% from the US.
Part of the attraction was the fact that Celltrion offers exposure to a new sector for Asian CB investors. The buyers also liked that the company is not owned by either the government or any of the country’s large conglomerates, which is the case with most other CB issuers in Korea.
The CB was offered with a coupon between 2.25% and 2.75% and a conversion premium of 25% to 35% over yesterday’s close of W28,300. Both terms were fixed at the investor-friendly end for a coupon of 2.75% ad a conversion premium of 25%. The latter will result in an initial conversion price of W35,375, although the company is soon to undertake a one-for-two reverse stock split, after which the conversion price will essentially double.
The bonds were issued at par and will be redeemed at par as well, so the yield is equal to the coupon.
While the technical terms are of less importance for a CB that cannot be hedged, a 350bp credit spread assumption resulted in a bond floor of 96.5% and an implied volatility of 18%, while a credit spread of 400bp produced a bond floor of 95% and an implied vol of 21%.
The 100-day historic vol is about 27%. The stock borrow cost was assumed at 5% and the CB will be adjusted for all dividends in full.
The stock has gained about 12% since early December and is currently close to its all-time high of W29,213 that it reached in late May last year. However, analysts note that drug approvals in new markets are likely to act as a catalyst for the share price, and the source added that Celltrion, which has a current market cap of about $5 billion, could be a very different company three years from now as it continues to develop.
“Investors should note that approval of Celltrion’s drugs in emerging Europe [its CT-P13 drug was approved in Georgia and Moldova in January] is an encouraging sign of regulatory acceptance of biosimilars in the emerging markets,” analysts at Nomura wrote in report late last month. “We now await Emea approval of CT-P13 in the first half of 2013, which we believe will be the next potential catalyst for the stock as well as for approval of the biosimilar in other emerging markets.”
Celltrion specialises in the development of biosimilars, which are cheaper generic versions of existing branded drugs, particularly antibody drugs for treatment of breast cancer, rheumatoid arthritis and lymphoma, as well as contract manufacturing of biologic drugs. CT-P13 inhibits the advance of rheumatoid arthritis and reduces the signs and symptoms of Crohn’s disease.
It already has sales contracts with distributors across the global market and is targeting a market share of 50% in emerging markets and 20% in developed markets outside the US by 2015, according to a research not published by J.P. Morgan.
One market participant noted that the CB slipped below par in the grey market about one hour into the bookbuilding, but this has been a common feature in the Asian CB market this year and no longer seems to be a firm indication of either the appetite for the bonds or the perceived value. After the order books closed at 9pm Hong Kong time, the bonds were again offered slightly above par.
J.P. Morgan was the sole bookrunner for the transaction, which is the second equity-linked deal out of Korea this year after Lotte Shopping’s $303 million exchangeable into consumer electronics retailer Lotte Himart in mid-January.
