Joint leads Credit Suisse First Boston, JPMorgan and Morgan Stanley completed an upsized $400 million five-year deal for Hyundai Motors on Friday.
The transaction was issued in the name of Equus Cayman Finance Ltd and was priced well inside initial guidance of 190bp to 200bp over Libor. And like most of last week's Korean deals, the leads deliberately went out with wide pricing in the hope of building the kind of momentum, which would draw in global accounts.
Indicative pricing was then tightened down to 180bp to 190bp over Libor, before the leads gave final guidance in the last few hours before pricing around the 225bp over Treasuries. Pricing came in at 99.634% on a coupon of 5.5% and yield of 5.585%.
This equates to 223bp over five-year Treasuries, or 173bp over Libor. Fees total 50bp. Because of a derivative structure backing the transaction, the deal also needed to incorporate a make whole call that would mirror it and this falls due one time in year three at 25bp over Treasuries.
Observers say the final order book amounted to $1.5 billion, encouraging the borrower to lift proceeds from $300 million to $400 million. A total of 113 investors were reported in the book, with just over 100 allocated.
By geography, the book split 46% Asia, 32% US and 22% Europe. By investor type, it split 55% funds, 20% banks, 10% insurance funds and the remainder private banks.
Because the deal has a Ba1/BB+ non investment grade rating, domestic insurance companies were unable to purchase it and bankers say there was only a very small percentage of orders from Korea. What did drive the deal was its rarity value and upgrade potential.
The group is currently on stable outlook from Moody's and positive outlook from Standard & Poors. Many analysts believe that if it can sustain its current growth levels and diversification of earnings away from Korea, a full upgrade is not far off. In August, the company announced a record market share in Korea, selling 53.4% of all cars.
Thus instead of the 100bp to 120bp differential some accounts might expect between an investment and non-investment grade credit, the deal was priced about 45bp to 50bp wide of comparables. The most relevant comps would be triple-B rated corporates such as LG Caltex and Kumgang Korea Chemical. The former has a 2008 bond trading around the 145bp level over Libor and the latter a 2007 bond at 140bp over.
Hyundai Motors itself has two outstanding eurobonds, although both are very illiquid. Compared to these two bonds, pricing is very tight. For example, the group's $125 million 7.6% July 2007 bond puttable in 2004 was being quoted at 175bp over Libor and its $150 million 7.33% December 2005 bond about 10bp wider. The new bond was priced to the maturity rather than the call and is, therefore, 2bp tighter on a Libor basis, but four years longer.
The deal was necessitated by the redemption of a $500 million exchangeable in August. This deal had been structured by CSFB back in 2001 as a novel way for Hyundai Motor to monetize 13.1% of its stake in Kia Motor. It now holds 36.3%.
However, a large number of investors did not convert into stock leaving excess shares sitting in a Korean SPV. And because of the Accounting and Regulatory true sale treatment given to the orginal exchangeable, Hyundai Motor no longer technically owns them.
What the leads came up with is a derivative structure through which the issuance vehicle (Equus) enters into a swap arrangement with a couple of counterparties (CSFB and JPMorgan) and is able to immediately remove the shares from the Korean SPV and liquidate them over an unspecified period of time.
