Structured Equity Issue, S Korea Capital Markets Deal
A US$610m dual-currency convertible from South Korean chemicals maker LG Chem showed the potential for innovative equity-linked issuance from the country.
LG Chem launched three-year convertible bonds split between €315.2m and US$220m tranches on April 10.
South Korean issuers typically prefer to sell such instruments domestically, and LG Chem had never previously looked offshore. However, the acquisition of LG Life Sciences the previous year left it looking to monetise a stash of treasury shares, and the CB format met its objectives well.
Despite being a debut international issuer, LG Chem was not shy at testing a new structure. The CB was the first US dollar and euro dual-currency offering and also the first undocumented offering from a South Korean issuer.
Both tranches were launched at aggressive terms, with a zero coupon and zero yield. The euro tranche was marketed at a conversion premium of 40%–50% while the US dollar tranche guidance was 25%–30%.
To simplify the issuance process and allow greater flexibility in timing, the deal was executed as an undocumented offering, where there is no specific deal disclosure.
Investors were comfortable with the lack of offering circular, thanks to LG Chem’s status as a blue-chip company with a reputation for good corporate governance. As a result, the deal managed to generate strong demand from investors in Asia and Europe with participation mainly from outright buyers.
The deal had been structured to maximise interest from all types of CB investors. Some liked the US dollar tranche as it carried a lower conversion premium and provided more equity upside (the bond floor ended up at 90). Others preferred the euro tranche as a defensive play in a low-rate environment.
The euro tranche was more popular than the US dollar one, allowing it to be priced at the mid-point of the conversion premium at 45%. The US dollar CB was priced at the low end of 25%.
For Asian investors, the LG Chem deal also offered them some diversity in their China-heavy portfolios.
For the issuer, the dual-currency structure allowed it to raise funds for overseas investments as LG Chem has diversified businesses and a global footprint.
Credit Suisse was the sole bookrunner.
Both CBs traded well a day after the issuance. The US dollar CB traded at 100 in the secondary market, while the euro was quoted at 101.
Credit spread was assumed at 80bp and stock borrow cost at 50bp. Implied volatility for the US dollar tranche was 30. For the euro piece, implied volatility was in the mid-20s.