Korean instant messaging services provider Kakao Corp made its debut in the international bond markets on Monday, raising W230 billion ($200 million) from a zero-coupon bond exchangeable into shares of newly-acquired music distributor Loen Entertainment.
The transaction came as a surprise to the market because the company had already announced a separate W250 billion domestic convertible bond issue earlier this month. Equity-linked specialists said they had not expected the company to launch another capital raise within such a short period of time.
The deal was nonetheless well-received by investors since it ended a near-three-month hiatus. The last internationally marketed equity-linked deal in Asia was Bizlink’s $60 million convertible bond offering in late January.
Bond traders early on Tuesday said the new issue traded up to around 101% - 101.5% in the secondary market.
Overall the order book was more than two times oversubscribed with participation from both outright and hedge funds, one source familiar with the situation told FinanceAsia.
Underlying stock
The new bond is exchangeable into shares of Loen Entertainment, a K-Pop music distributor for Korean artists including IU, Girl’s Day and EXID.
In January, Kakao acquired a controlling 76.4% stake in Loen Entertainment for W1.88 trillion. The acquisition was funded with the help of a W800 billion bridge loan due later this year.
Bankers on deal said the exchangeable bond issue will be used to repay the bridge loan. Before the exchangeable bond sale, Kakao fell short of around W150 billion for the repayment.
Loen Entertainment is a much less well-known name than Kakao in international markets but its shares made up the underlying equity in the exchangeable bond offering because it is seen offering more potential upside than its parent, which has been struggling from slowing user growth for its flagship KakaoTalk instant messenger, according to the source familiar with the matter.
Loen Entertainment’s first-quarter net profit surged by 37.6% year-on-year to W15.1 billion. In comparison, analysts expect Kakao’s net profit to dip by more than 40% on slowing advertising business growth and heavy marketing expenses.
Terms
The initial marketed terms for the five-year bonds include zero-coupon, zero-yield and an exchange premium range of 27.5% to 32.5% over Loen Entertainment’s W82,300 share price close on Monday. The final exchange premium was set at 27.5%, translating into an exchange price of W104,933 per share, or 8% above Loen Entertainment’s all-time high of W96,900.
It was issued with a three-year put for bondholders and an issuer call after three years, subject to a 130% trigger.
The bond is won-denominated and US dollar-settled, meaning investors will have to bear certain foreign exchange risks as they could make a loss if the Korean won depreciates against the dollar.
To help compensate, joint bookrunners Citigroup and Morgan Stanley brought in Koonmin Bank as a third-party guarantee for the bond issue. The A1/A/A credit is also deemed necessary for Kakao, which is unrated by international rating agencies.
It is the second time a Korean issuer has applied a third-party guarantee for an equity-linked issue. Last year, Hyundai Heavy Industries issued $220 million in exchangeable bonds into Hyundai Merchant Marine with a credit enhancement from Korea Development Bank.
In view of Loen Entertainment’s low liquidity (it has an average three-month trading volume of 60,000 shares), Kakao has provided stock borrow for the entire deal in order to facilitate hedging.
Underlying assumptions were a bond floor of 92.5% and implied volatility of around 25% to 26% based on a stock borrow cost of 150 basis points and full dividend protection.
Loen Entertainment's share price ended down 6.8% at W76,700 on Tuesday.
