Korea construction firm Doosan Infracore closed a $500 million hybrid on Tuesday night, and bankers expect that its structure will be replicated by other lower-rated borrowers that would struggle to raise funds or have to pay up on a standalone basis.
The 30-year non-call five-year hybrid was unique as it offered a credit enhancement and a put option to investors. Korea Development Bank, Woori Bank and Hana Bank, which are all investment-grade banks, act as credit-facility providers and will provide funding for the put.
Investors can put the bonds at par at the fifth year, and there are also caveats under which they are able to sell the bonds earlier — such as if Doosan Infracore goes bankrupt or if Korea Development Bank is not wholly government-owned.
“Most hybrids depend on incentives to call, but in this case, the control is in investors’ hands, as they have a put option,” said one source familiar with the deal.
Credit-enhanced bonds, which enable borrowers to tap the market at a more competitive rate, are becoming more prevalent. China Resources Cement is marketing a dollar bond for which DBS is providing a standby letter of credit. Meanwhile, in the dim sum market, Xiamen ITG Group is also marketing a bond that is guaranteed by China Eximbank. ANZ, DBS and ICBC Asia are the arrangers.
Doosan Infracore’s hybrid enabled it to tap the market at a much better rate than it would on a standalone basis. It will be classified as equity under accounting rules, which helps the company manage its debt profile. According to one analyst, the hybrid will lower Doosan’s debt-to-equity ratio from 250% currently to around 200%. Doosan will use the proceeds to refinance debt and for working capital.
The company is unrated but the hybrid is rated A- by Fitch. If Doosan Infracore were rated, according to one banker, it would be a non-investment grade credit. The bond paid a distribution of 3.25% and the hybrid was reoffered at 99.643 to yield 3.328%. Given the competitive rate, other companies are said to be looking at the structure.
“We expect the structure to be replicated by other lower grade issuers,” said one banker.
The hybrid has a 30-year maturity, but revolves into a new 30-year bond. However, most investors were looking at the hybrid as a five-year bond, given the enormous 5% step-up at the fifth year if the bonds are not called. There is an additional 2% step up at the seventh year.
The hybrid priced at Treasuries plus 265bp, at the tight end of the Treasuries plus 265bp to 270bp final guidance, and the bonds tightened to Treasuries plus 250bp in secondary on Wednesday.
“It looked pretty attractive to me,” said one Singapore-based investor. “KDB, Woori Bank and Hana Bank are credit facility providers and those banks’ paper is trading at around Treasuries plus 150bp. It looks like a good way to get pick-up and exposure to the quasi-sovereign space.”
Korea Development Bank had guaranteed Doosan’s Infracore’s last dollar bond and, along with Woori Bank and Hana Bank, it is clearly a relationship bank. For its previous bond, Korea Development Bank has to make coupon payments if Doosan is unable to pay them. However, for its hybrid, Doosan Infracore can defer distributions. However, investors will get the principal, and any deferred and accrued distributions if they put the bonds at the fifth year.
Doosan’s hybrid attracted an order book of $3.5 billion. Asian investors were allocated 86% and European investors took the rest. Fund managers took 59%, private banks 27%, banks 10% and insurers 4%.
Citi, J.P. Morgan and KDB were joint bookrunners.
