LG Uplus, the telecommunications firm that was set up through a three-way merger between LG Telecom and two other group companies in January this year, has sold $300 million worth of bonds convertible into treasury shares. The deal was launched after the Korean market closed yesterday and completed within three hours.
Analysts have noted that a monetisation of the treasury shares, which were created in connection with the merger and account for about 16% of the outstanding share capital, would have a positive impact on the firm’s valuation and perhaps partly because of that, the deal was well received, allowing for the $100 million upsize option to be exercised in full.
Clearly it is in LG Uplus’s interest to see the CBs convert into equity to get the treasury shares off its books and, as a result, the deal has an unusually short maturity of just two years with a put at 18 months. It also features an innovative coupon and dividend protection structure to push investors to convert early.
Instead of paying the annual coupon after 12 and 24 months, bondholders will receive the first coupon payment after six months and the second one after 12 months, with no further coupon payments after that. Similarly, CB investors will be compensated in full for all dividend payouts in the first year, but only for dividend yields above 3% in the second year.
The company’s current payouts translate into a dividend yield of about 4.5% and essentially this structure means that beyond the first year, investors will only get access to the full dividend if they convert.
Of course, these incentives will mean nothing if the share price doesn’t go up and, based on the performance so far this year, that doesn’t look so promising. Having briefly moved above W9,000 in January, the stock has traded mostly in a range between W7,000 and W8,000 since then. Yesterday it closed at W7,360. Analysts are also divided on the near-term upside with 15 “buys”, 14 “holds”, and two “sells” on the stock.
Also, despite its desire for investors to convert, the company didn’t skimp on the conversion premium. In fact, the premium was fixed at launch at 25% over yesterday’s volume-weighted average price of W7,419 – the highest premium for an unhedgeable Asian CB in quite some time – resulting in an initial conversion price of W9,273.75.