SK Telecom last night sold $300 million of five-year convertible bonds to raise the funds needed to cover the redemption of an outstanding CB that matures in May. The sale, which had been well-flagged by the Korean telecom operator earlier in the week, was considered crucial since it is the first CB of relevance by an Asian issuer since September and the level of success could determine whether other companies will follow suit.
According to sources last night, the deal was fully distributed in time for the US market opening and, while details of the subscription levels or number of investors weren't available, some investors at least had their orders scaled back. SK Telecom's share price in the US was down as much as 6.4% by lunch time, but the stock rebounded in the afternoon to end a modest 0.4% lower -- a decent outcome given that the Dow Jones finished down 1.15%.
On paper, SK Telecom is just the kind of issuer to re-open a market that has been dead for six months. It is a good company with steady cash flows that is rated a "buy" by more than 90% of the analysts that cover it, a repeat issuer, a strong credit, and there is plenty of stock borrow available.
As it were, the deal turned out to be much more controversial than anticipated. When the term sheet was distributed to investors in the early evening it emerged that Nomura had been added as a joint bookrunner at the last minute, alongside Barclays, Citi and Credit Suisse, which had been sounding out the market for a deal earlier in the week. It quickly became clear that the Japanese bank was more than just a joint lead, it had in fact bought the deal. Investors said it appeared that Nomura was the only bank among the four that was on the telephone drumming up orders, and the other bookrunners soon started to refer all inquiries about the CB to Nomura.
The obvious interpretation of events is that Nomura, which is keen to expand in Asia following its acquisition of Lehman Brothers' businesses here, wanted to be part of the deal to make its mark on the CB market early in the year. To do so, it was prepared to take a few extra risks. Nomura is active in terms of secondary bond trading, which may have given it the confidence that it would be able to distribute the CB.
More than a few specialists said last night that this surprise development meant that the terms on offer were significantly more aggressive than they ought to have been for a deal that was meant to re-open the market. And while SK Telecom was a name that could probably handle those terms, they were not particularly attractive for investors and could result in a less widespread distribution. The concerns were also visible in the gray market, where the bonds traded slightly below par during the bookbuilding.
The five-year bonds, which can be put back to the company after three years at par, were offered to investors with a fixed conversion premium of 23% over yesterday's closing price of W187,000 and a coupon ranging from 1.5% to 1.75%. Since the CBs are both issued and redeemed at par, the coupon is also equal to the yield.
The coupon was where Nomura's appearance on the deal is believed to have had the most impact with one source saying potential coupon levels of as much as 3% were talked about in the market last week. It was therefore no surprise that it was eventually fixed at 1.75%.
The 23% premium will give an initial conversion price of W230,010, which is not too far from the 2008 high of W228,000 that the stock reached in mid-November.
The credit assumptions used appear to have ranged from 350bp, which is in line with SK Telecom's credit default swaps, to about 500bp. Stock borrow is widely available in the form of SK Telecom's American depositary receipts in the US and investors will get compensated for dividend yields above 1%.
Based on the lower credit spread, the bond floor comes out at about 90% and the implied volatility at about 28%, while at the higher spread, the bond floor would fall towards the mid-80s and the implied vol edge up towards 30%. The historic volatility in the Korean stock is in the 30s, while the more volatile ADRs are in the 50% range.
The deal attracted interest from some fundamental investors, even though as a steady income company, the equity story isn't that exciting. Also, not everyone agreed that the bond floor offered the level of downside protection that would make it a really attractive option for investors who wanted a low-risk play on the potential upside. By the same token, the CB may not have been cheap enough from a technical perspective to draw in the usual hedge fund buyers in large numbers. However, hedge funds don't appear to have been the key target for Nomura.
Despite the wide-spread misgivings, it appeared last night as if Nomura had pulled off its little coup, although the way it was executed did cause more confusion than comfort. The trading in the CB over the next few days should be able to shed some more light over who did buy the bonds and whether this deal will indeed give Asian issuers the confidence to return to the CB market.