While most other issuers are staying on the sidelines pondering the continuing volatility in global equity markets, Korean memory chip maker Hynix Semiconductor pushed through a $500 million convertible bond late on Tuesday. The deal had been more than a week in the making with earlier launch attempts disrupted both by the market conditions and the initial unwillingness by the issuer to give on price. And, consequently, eyebrows were raised when the company made the decision to go ahead on a day when Asian and European markets were once again trading down after the enthusiasm over an EU emergency loan package proved short-lived.
In the end, Hynix agreed to a higher coupon in order to get the deal out the door, but even with that concession, the deal failed to attract much interest at par. In fact, even before the launch at around 5.45pm Hong Kong time, the bonds were offered in the grey market at 98.5.
But rather than bite the bullet and re-offer the CB at a lower price -- which would have been the normal way of dealing with this situation -- the five bookrunners decided, after several hours of trying to build a book, to break up the syndicate and instead have each bank sell the bonds in the secondary market on their own.
According to sources, investors were a lot more keen to buy the bonds at lower prices and the bookrunners were able to offload a decent amount of paper at prices between 98.5 and 99. Not surprisingly, though, given the large size of the transaction and the ongoing turbulence in European markets, they were unable to sell the whole thing and one source involved in the transaction estimated yesterday that the combined syndicate was still holding a bit more than 20% of the deal.
Among the bookrunners, Credit Suisse and Royal Bank of Scotland were said to have underwritten about 75% of the deal, while the domestic banks, comprising Korea Development Bank, Korea Exchange Bank and Woori Investment & Securities, covered the rest.
A redeeming feature for the banks, which would have had to give up most of their fees to sell the bonds they did sell, would be that the CB is not particularly expensive at these levels -- some said it was even quite attractive -- and if the markets stabilise the demand should pick up. In particular, the implied volatility of 23% (at par) is notable as it is more than 20 points below the realised volatility -- and this is a name with plenty of stock borrow where it is actually possible to trade the volatility.
The bonds have a five-year maturity, but can be put back to the issuer after three years, and come with a par-in, par-out structure. They were offered with a coupon between 2.25% and 2.65% and a fixed conversion premium of 30% over the latest closing price of W26,600. Given the lack of demand, the coupon was fixed at 2.65%, although given the market conditions it was most likely never intended to end up anywhere else.
The valuations were based on a credit spread assumption of 450bp over Libor, a 100bp stock borrow cost and a full dividend pass-through. The bond floor ended up at 90.5%, based on an issue price at par.
The buyers were said to have been primarily hedge funds, which partly explains why the demand was on the thin side.
"To do a deal this size you need both the Asian hedge funds and the European outright buyers and the latter are non-existing right now," said one CB specialist, referring to the fact that most European funds are busy dealing with the ongoing debt crisis at home at the moment. There have also been reports that funds have been facing redemptions since last week, which would make them hesitant to buy into new issues.
That made Hynix's desire to go ahead with the deal at this time even more curious. The company doesn't have an urgent need for the money as it is sitting on about $2 billion of cash and generated about $1 billion of Ebitda in the latest quarter. It is likely that it saw an opportunity to issue bonds from a point of strength a few weeks ago - the market for memory chips is doing pretty well right now - and by the time it got the board approval in place last Tuesday it was unwilling to concede that the market had largely fallen away in the meantime.
Bankers also note that Hynix, like other companies that have a December year end, was also fast approaching the end of the issuing window under the 135-day rule. In fact, yesterday would have been the last day it could have issued securities based on a circular containing audited financials from December. From today, companies will need to provide updated data from the end of March, which typically take four to six weeks to complete. That may have prompted the Hynix management to push a bit extra to get the deal done now.
Initially there were three more international bookrunners working on this deal but as the markets worsened and the company was unwilling to ease its yield targets, they backed off one by one. The company had board approval to offer a coupon between 1% and 3% and was not surprisingly keen to see it at the bottom of that range.
First to drop out last week was Bank of America Merrill Lynch and it was followed on Wednesday - the day when the company first tried to do the deal - by J.P. Morgan. The latter bank may have had its own reasons for being reluctant to commit, seeing as it lost its two main CB origination bankers mid-last week, but the fact that banks chose to drop out of a deal by such a well-known issuer like Hynix does also suggest that the company may have pushed it a bit too much this time. Normally deals by this type of issuer are highly contested and to begin with Hynix was no different. The final bank to drop out was Goldman Sachs, which stuck with the deal into this week, but decided to call it quits just before launch on Tuesday - supposedly because it didn't feel comfortable with either the size or the price, or indeed the two in combination.