- Asia's primary equity-linked bond market challenged by cheapness in secondary
- Investors prioritizing balance sheet management as valuations nosedive
Australia's Seven Group [ASX:SVW], an investment firm focusing on industrial services, oil and gas as well as media, priced Asia's first equity-linked bond in six weeks on Thursday (7 October), a deal that nonetheless suggested the region remains far from a comeback that was witnessed in Europe, given cheapness in the secondary.
Merrill Lynch and Macquarie together with the management wall crossed around 10 accounts on Seven Group’s exchangeable bond (EB) into Boral Limited [ASX:BLD], the first source added. "Not all of them joined," he acknowledged.
Of the holders owning Seven's existing CB, some are "happy with the credit and hence are holding till put (redemptions) next year, while there is also a number of them are looking to reduce their exposure to the market...so quite happy to sell but not switch into the new one."
As reported by this news service and stated in a term sheet, the EB is intended to help Seven refinance its own convertible bond puttable in January 2023.
The EB, which was launched around 3:30pm Hong Kong Time Thursday, covered around 4:30pm Hong Kong Time, and closed 8pm Hong Kong Time, was "significantly oversubscribed" but not to the extent of 3x-4x covered in this market," the second source said.
Both declined to be more specific about the coverage ratio.
What came somewhat as a surprise is that most of the funds invested in the EB were from investors who didn't already own Seven's CB, said the two sources. That helped Seven Group limit the concurrent buyback of its own CB at AUD 114.2m.
The EB, indicated below par during bookbuild hours, traded around 97.5 Tuesday (11 October) afternoon, while Seven's own CB was traded around 99.
The bond was put in the hands of roughly 30 accounts in a very top-heavy book, the second source said, with long-onlys accounting for roughly a quarter of the deal.
Ten investors put in material bids - though even some of them did scale back their orders - and a significant number of the top 10 were new investors, the first source added.
"It was a monkey see monkey do book, so even though there was a capacity to upsize we decided not to," he added.
When asked why Seven decided to go with an EB instead of another CB of its own, the first source said the company has a view of its intrinsic value, based on which terms offered wouldn't have been appropriate.
According to one participant, he went with a 400 basis-points credit assumption for the deal, with no slippage given a delta placement, a 25 basis-point stock borrow cost with the equity hedge provided by the two arrangers, and an input volatility around 25%. That would give the note a fair value at 105-107.5, an implied volatility at 12.5%-16.5%, delta at 63%-65%, and a bond floor at 89-91.
"It was modeled very cheaply, but that alone doesn't necessarily mean it's a good deal," the investor said.
A lower premium would have worked better, especially for a deal of this size in this market.
"Right now the delta is quite high, but if the stock comes down 10%-20%, the delta would go away before you know it," he added.
Investors who bought the notes at the primary so far this year would be nursing their wounds, with Lenovo's [HKG: 0992] USD 675m CB trading around 88.5, ZTO Express [NYSE: ZTO, HKG: 2057] USD 1bn note at 95.5, China Meidong Auto’s [HKG:1268] USD353m paper at 77, Country Garden's [HKG:2007] USD 501m CB around 33.
"What's not cheap (in the secondary)?" said a second investor. He said he doesn't buy on dips but does add papers "very selectively."
"You never know if you are catching a falling knife," he said.
The first investor's cash now makes up around 50% of his portfolios - a record high - up from about 10% at the end of 2021.
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