Daewoo International CB upsized to $300 million

Korean trading company Daewoo International has raised $300 million from a convertible bond that was well-received both by CB investors and the equity market. By using a structure with multiple resets that is common on domestic Korean CBs and by adding extra yield on top of the cash coupon if the bonds are held to put or maturity, the unrated issuer was able to keep down the annual cash interest costs. This was the company's first foray into the international capital markets since emerging from a group restructuring 10 years ago.

The deal, which was completed late Wednesday and arranged on a sole basis by Credit Suisse, was surrounded by none of the negative comments about structuring or rumours of poor order volumes and quality that have accompanied most of the other Asian CBs so far this year.

That CB investors were pleased with the deal was evident by the fact that it was upsized from $250 million and traded up to 101.00 immediately after pricing, and support from equity investors meant that the share price fell only 2.6% in the wake of the transaction yesterday. The latter meant that the CB was able to edge up another few notches -- the pricing of the CB had essentially assumed that the share price would fall by about 5% and when that didn't happen, the bonds adjusted upwards. By the end of the Hong Kong trading session yesterday, the CB was bid at about 103.00, according to a source.

The CB has a five-year maturity, but can be put back to the issuer after two years for a yield of 5.25%. Like the other terms, the yield was fixed in the middle of the indicated 5% to 5.5% range, which earned the issuer some kudos with the investors. It also suggests that there was actually some bookbuilding going on before pricing, while on several of the other CBs this year the ranges have almost seemed like an after-thought or an add-on once the terms that would be acceptable to investors have already been set.

The bonds were also marketed with a 3% to 3.5% coupon and a 25% to 35% conversion premium over Wednesday's close of W28,450. Sticking to the mid-points, the coupon was fixed at 3.25% and the premium at 30%.

The conversion premium, which resulted in an initial conversion price of W36,985, was one of the highest among the handful of Asian CBs this year, although the resets mean that if the share price doesn't perform, the conversion price will be lowered to fit the poorer market environment. Essentially, this gives the bondholders some additional protection as it will limit the value deterioration of the CB if the share price fails to go up or, indeed, falls. Under the terms of the CB, the conversion price can be adjusted as low as 70% of the market price at issue.

Resets, if needed, will take place after six months, 12 months and every three months after that. The bonds also have an issuer call after three years, subject to a 130% hurdle, that can be used to force conversion.

Like the S$275 million ($188 million) CB issued by Chinese property developer Yanlord Land Group last week, the Daewoo issue did not provide a stock borrow facility and with virtually no stock lending available in the market, it was no surprise that many of the investors bought the deal on an outright basis for the equity story. This is a trend that has gathered pace this year and which has been reinforced by the fact that many of the traditional CB investors (read hedge funds) who bought CBs to play the implied volatility, are either no longer in business or have seen their funds shrink significantly in the wake of the financial crisis.

While Daewoo's exports and imports span a wide range of good and sectors, including steel, cement, crude oil, heavy machinery, automobile parts and textiles, the equity story that investors are most focused on at the moment is its involvement, through a consortium, in a gas field in Burma. While this adds credibility to the company being treated as part of the global commodity story, some investors also look at the stock as something of a play on China since the gas generated at the Burma field is sold to PetroChina through an off-take agreement.

The focus on the equity story was facilitated by the fact that the management was made available to investors on the day of the deal, making the offering a semi-marketed affair as opposed to just launched off a term sheet as is the common practice in Asia.

And the tactic seems to have worked, as the deal was about 2.5 times covered and attracted approximately 50 investors.

Because of the focus on outright buying, investors weren't so concerned about the credit, and sources say nobody took issue with the credit spread of 800bp over Libor that was indicated by the bookrunners. The stock borrow cost was assumed at 5% and bondholders will be compensated for all dividend payouts. This gave a bond floor of about 92%. Because of the resets, the implied volatility is difficult to calculate but would probably end up in the 20s, one source estimated.

Daewoo will use half of the proceeds to repay short-term trading-related debts in order to lengthen the maturity profile of its borrowings, while the other half will go towards investment projects.