Equity-linked gets Slim's backing

5 min read
Americas
Owen Wild

Carlos Slim’s America Movil last week gave the equity-linked market a much-needed shot in the arm with a record-breaking €3bn bond exchangeable into Dutch telecoms firm KPN. Investors rushed to buy with a flood of orders at strike, allowing the deal to be priced at the best terms for the issuer and still be 2.5 times covered.

The deal had actually launched as a more modest €2.25bn five-year issue with a €250m upsize option, but quickly blew through this level. Sole global co-ordinator Deutsche Bank and joint bookrunner Barclays had always intended to hit €3bn if possible, but as this was so large compared with previous issues it was deemed judicious to launch at the smaller size and build momentum.

At €3bn the Mexican telecoms company has issued the largest ever corporate (non-financial) exchangeable bond and the largest equity-linked issue for five years, among many other records. A record-breaking deal is more typical of a market that is hot rather than one where the number of deals globally has dropped by a quarter year-on-year, but the scarcity of other investment opportunities was part of the reason for the rush to buy.

It also helped that this was a deal from a top credit that did not ask investors to pay for the privilege of lending it money.

“We felt this was the most attractive proposition put in front of investors for some time – a solid investment-grade issuer; the Carlos Slim stardust; an underlying company going through a turnaround; the hint of M&A in the sector; and a zero, rather than negative, yield – so it looked like you wanted to own it,” said Tom Swerling, head of EMEA ECM cross-holdings origination at Barclays.

Full value

Investors agreed sufficiently to swallow punchy pricing of zero coupon (from zero to 0.5% guidance) and 45% premium (40%–45%). Bankers on the deal estimated that cutting one-eighth on the coupon, to negative levels, would have cost more than 5% off the premium, so would have been a vanity move and was thus not considered.

The 45% premium is particularly challenging as America Movil has retained the dividend, with protection only above eight cents per share, so investors cannot rely on the income stream – on a yield stock – to help achieve conversion.

A recurring concern in recent European deals has been the struggle for issuers to capture full value for their bonds at issue. For example, Unibail-Rodamco last month achieved stellar terms on a €500m convertible issued with a 7bp negative yield, yet the bonds traded at 105 one day after issue.

In the case of America Movil, the implied volatility of 24 was just slightly back from historic levels of 26 and, aided by the jumbo sizing that meant most investors actually received a decent allocation for once, the bonds traded immediately after issue at 100–100.05 and around 101 the following day.

Not a seller

One perpetual question around exchangeable bonds is the intention of the issuer – is this a method of disposal or a financing exploiting the value of the underlying? In this case, the equity-linked and cash equities sales-forces of Barclays and Deutsche were quick to reassure institutions that this was an opportunistic financing move capitalising on a share price up more than 30% in the year to-date.

The deal was carefully structured to ensure AMX retained its board seats, voting rights and dividend. AMX can also settle in any mix of cash and stock it wishes at exchange.

The final book of demand was 60%/40% long-only versus hedge funds and included just about every major equity-linked investor. The strength of appetite was neatly encapsulated in two facts: first, only one of the wall-crossed investors put a price limit on its order; and second, even those accounts that received favourable allocations were grumbling about how little they got.

Most challenging for bankers is having something to sell, rather than demand once they go to market, so the move by America Movil is potentially – hopefully – significant.

“A highly regarded investor such as Carlos Slim using equity-linked products will certainly pique the interest of others. But if it will be a catalyst remains to be seen,” said Swerling.

(This story is to appear in the May 23 issue of the International Financing Review, a Thomson Reuters publication.)

Carlos Slim