Life is returning to the equity-linked markets: Nomura, newly stocked with ex-Lehman staff, intends to make the most of it.
The convertible bond market has been coming back to life, first in the US and now in Europe and Asia. As it does, some investment banks have been caught with their convertibles resources depleted by staff cuts. But not Nomura, which has had an infusion of new blood from Lehman Brothers and has been doing some roaring business.
Paul Dolan, the bank's global head of convertible bonds, joined Nomura with a team of 16 from ING in 2003. In 2007 he moved to Hong Kong, to drive further expansion into the Asia-Pacific region. Last year he was joined by the Asia equity-linked team from Lehman. Although Nomura had traditionally been strong in trading, sales and research, the former Lehman staff brought some important corporate relationships.
Primary business, however, has been quiet. By March this year there had been no convertibles issuance out of Japan or the rest of Asia since last summer. For some years, trading in these assets had been dominated by hedge funds, notably those pursuing convertibles arbitrage strategies. That strategy turned out to be the worst performer of 2008, bruising a lot of players in the process, generating wholesale redemptions and a broad withdrawal from the market.
"The result was significant price pressure on the secondary market," says Mr Dolan, "and the weaker credits had become very high-yield in the nature of their pricing." That prompted an influx of investors who hadn't bought convertible bonds in the past but were seeking higher returns. They included equity investors, distressed debt funds, private equity players and a host of others.
So while the primary market was closed, the secondary market was fizzing. "We were very busy in the secondary market in Japan, non-Japan Asia and Europe," says Mr Dolan, "and so we were in a very good place to have clear visibility of the market."
Primary market stirs
Life had begun to return to the US primary market in January, and the question was when the time would be right for Asia to come back on stream. Then in mid-March, the Nomura team heard that SK Telecom (SKT), South Korea's leading wireless telecoms provider, was coming to market with a convertible bond. Much to the irritation of the banks already advising SKT on the deal, Nomura swooped.
"We decided that we wanted to bring this transaction to market," says Neeraj Hora, head of Nomura's Asia (excluding Japan) equity-linked solutions group, who played a similar role at Lehman Brothers until 2008.
There were several reasons for this. One was a desire to show just what the Nomura and legacy Lehman team was capable of. Another was an existing relationship with SKT, whose previous convertible issue had been underwritten by Lehman. "SKT was a blue-chip client and a strong credit. Its stock was liquid and we felt this was the right trade to re-open the Asian market," says Mr Hora.
Mr Dolan agreed and Nomura made an offer to buy the whole deal. It was named joint bookrunner but on the 'lead left' position, with control over pricing and allocation, alongside Barclays Capital, Citi and Credit Suisse.
This was a refinancing trade, with the proceeds intended to redeem an existing $330m convertible bond due to mature in May. The existing bond was "dead money", with low equity sensitivity, according to one banker. In fact, there was not much equity-sensitive Asian paper in the market generally, with most convertibles trading like straight debt securities.
"That was an additional reason why we felt there would be strong demand," says Mr Dolan, "because investors in the existing bond were likely to swap out and buy the new one to extend duration and increase equity sensitivity within their portfolios."
Based on its secondary trading experience, Nomura believed it knew exactly where to find those investors and what they would be prepared to pay.
"We felt we knew where the majority of that paper was held and why the trade would clear at a particular price," says John Mandich, Nomura's global head of convertible bond sales.
Nomura believed that the issue could be priced more aggressively than was originally contemplated. Before it arrived on the scene, early price talk had hovered in the region of a 2% to 3% coupon. It was finally marketed with guidance of 1.5% to 1.75% and a conversion premium to the existing share price of 23%, before being priced at par to yield 1.75%. The issue of five-year bonds with a three-year put raised $332.5m and was Asia's first equity-linked offering since last August. "We created a successful deal," says Mr Mandich. "The terms were good for the company and good for the investors. That was borne out by the geographic spread of the distribution across all three regions: Asia, Europe and the US."
Savings made
On top of that, Nomura believes that the terms on which the transaction was finally brought to market saved its client between $10m and $20m. Rival bankers say the aggressive terms meant the bank was left holding much of the paper, although Nomura denies this. Either way, it brought the same aggression to bear on its next big convertible deal, for Beijing Enterprises.
Listed in Hong Kong but controlled by the Beijing municipal government, Beijing Enterprises is a conglomerate with interests in gas, water, roads and beer. It also had links with the old Lehman and, unlike the SKT deal, Nomura was in on this one from the start.
The company was seeking funds to finance capital expenditure and potential acquisitions. As with SKT, Beijing Enterprises is a blue-chip stock with stable cashflow but with the added appeal of being a quasi-sovereign credit. There was vigorous competition for the bookrunning mandate, which was eventually won by Credit Suisse and Nomura, with Nomura again on the left with 'superior economics' - it took 70% of the risk and reward.
"We bought the deal on a Friday evening [April 24], which was almost completely unprecedented," recalls Mr Hora. "That means you are taking weekend risk if you can't sell the bonds. But the book was over 2.5 times covered."
The fully underwritten transaction began with a suggested coupon range of 2% to 2.25% and a conversion premium between 22.54% and 27.54%. With a five-year maturity and a three-year put, it drew interest from more than 60 investors, including pension funds, plain equity funds, fixed-income funds and hedge funds.
The pricing was fixed at 2.25% with a 22.54% conversion premium and the deal raised HK$2175m ($281m). It was the first international equity-linked offering in China or Hong Kong since May 2008.
Continuing improvements
Equity-linked markets in all regions continue to improve, although they have yet to regain the strength they had a year ago. The thaw began with solid names that had a track record (and therefore some pricing transparency) in convertibles issuance. Then, unrated but recognised names found themselves able to issue in certain markets.
In Europe, the market has moved on further still. Nomura was global bookrunner on Canadian miner First Quantum Minerals' recent $500m convertibles issue (6% coupon, 35% conversion premium). Its success was a measure of the market's progress to date, says Lorraine Lodge, an executive-director in Nomura's European ECM team.
"The company is unrated and had no existing convertible bonds," she says. "Yet we opened at $350m, increased to $450m the same day and exercised a $50m greenshoe the following morning. That's a sign of how the European market has opened up."
Asia hasn't quite got there yet but Nomura is on the alert for opportunities. "The convertibles market remains open," concludes Mr Hora. "This is an innovative and creative asset class. And we are ready, willing and able to be aggressive around transactions we care about, both from a corporate relationship standpoint and in terms of providing value for investors."
