Delivery Hero [FRA:DHER] equity-linked investors jumped at the chance to sell out-of-the-money paper to buy a new bond at a better strike price and higher coupon, sources and investors following the transaction have told this news service.

The issuer was able to significantly lengthen its debt maturity, printing a new EUR 1bn 3.25% 2030 convertible bond overnight, having launched after European close on Monday 13 February to finance a tender offer of outstanding bonds.

That coupon landed below the original indicative range of 3.5%-4.0%, while conversion premium of 40% over the volume weighted average price (VWAP) of EUR 41.25 came at the best end of terms set at 35%-40%.

The transaction was in high demand with over 125 lines in the book, which was tightly allocated, according to a source close to the deal. The new 2030 paper trades above par in the secondary market, as of early afternoon (14 February), two investors noted.

Financing outstanding Delivery Hero convertible bonds maturing in 2024 and partially refinancing bonds maturing in 2025, the issuer saw a change to extend its maturities and increase liquidity, the first and a second source close to the matter argued.

Delivery Hero saw a chance to extend its liabilities, increasing the company’s liquidity and help strengthen its balance sheet, this source and a second close to the deal said.

The issuer is consequently able to buy back the outstanding EUR 763.4m in 2024 bonds at 96.375 rather than redeeming the bonds at par at maturity, an investor added.

For the 2025 notes, it will buy up to EUR 250m in bonds back at a maximum price of 87.25, rather than redeeming at par in two years’ time, the same investor noted.

Both prices were a slight premium to existing market prices, wrote Davide Basile a partner and head of the convertible bonds team at Redwheel wrote in a note this morning (14 February).

Noting the European high yield spread has tightened significantly of late, Basile said he was “a little surprised” that Delivery Hero was so keen to refinance given it has EUR 2.4bn cash and an undrawn revolver credit facility of EUR 425m at its disposal.

However, a second investor said it made sense for Delivery Hero to do the deal now.

“Even if there may still be some time until those maturities, as a very capital-intensive business Delivery Hero must be opportunistic and refinance when they can,” they said. Appetite for a benchmark equity-linked deal may not always be as strong as it is today “in the current volatile environment”, this investor added.

Easy choice for investors

Selling the old paper to buy the new bonds given how far away the outstanding paper is from the deal conversion price was an easy decision, one of the investors and a third participating in the deal noted.

An investor further added that there had been reverse enquiries from some holders of the old paper, seeking early redemption and a new issue.

Though the deal priced through terms on the coupon, meaning even cheaper debt issuance for Delivery Hero, it made sense for investors to redeem old paper that was yielding less than 1% to buy the new deal yielding 3.25% at a far more attractive better strike price, a banker not involved in the situation said.

“You take this deal every day of the week,” the banker said.

Delivery Hero has seven converts maturing up to 2030, according to Dealogic data. Redeeming old paper well ahead of time is a positive, according to both deal sources. 

It is attractive to maintain or take a position in these converts given Delivery Hero is solidifying its profile as an issuer “which will likely redeem well ahead of maturity”, the second source said.

Alongside the convertible was a EUR 236.67m delta placement to allow investors in the bond to hedge their exposure to the stock.

The placing was priced at the VWAP of EUR 41.25, 6.53% discount to the previous close. This covered around 2.15% of the stock at a liquidity cost of around 3.04x according to Ion Analytics’ Price of Liquidity model.

While this was wider than the average 2.5x per unit of stock in a quiet January, the second source said the deal team was happy with the result given investors want more left on the table to take part in a delta placement, given it is primarily an exercise in shorting the stock by buyers of the convertible.

This means fewer long-only names tend to take part than might be seen in a traditional block trade, widening the discount.

"Delivery Hero confirms the placement of convertible bonds with an aggregate amount of EUR 1bn, which will reach maturity in February 2030. The company intends to use the proceeds from the issuance of these bonds to finance the tender offer for outstanding convertible bonds due in 2024 and 2025, as well as for general corporate purposes," a Delivery Hero spokesperson said.   

"With this transaction, Delivery Hero proactively addressed the earliest future maturity of its outstanding convertible bonds by taking advantage of an attractive window in the convertible bond market, aiming to strengthen its balance sheet and improve its debt maturity profile, while also preserving a strong liquidity position. This transaction is in line with Delivery Hero’s commitment to execute on the path to profitability, while the company confirmed the adjusted EBITDA and Free Cash Flow guidance for 2023 last week," the spokesperson added.