Traction in European convertibles markets helps deliver a bumper year for Italian bank's new-look ECM team. 

Unicredit team

Clockwise from top: Tareen Carmichael, Akshay Diljit, Matthias Janssen, Francesco Pilardi and Jana Hecker

As equity capital markets (ECM) dusted themselves off in the wake of this year’s Covid crash, convertibles issuance boomed. The new-look ECM team at UniCredit has been increasingly prominent in this market, climbing into the top five in the European equity-linked league table.

“We thought at the start of the crisis that this wasn’t going to be a great year, that markets would go into hibernation,” says Jana Hecker, UniCredit's global head of ECM. “Instead, we have been running at 200% capacity.”

Ms Hecker stepped into her new post in March, just as equity markets were tanking. After stints at JPMorgan and Goldman Sachs, she was most recently co-head of equity cash and strategic derivatives for Germany, Austria and Switzerland at Deutsche Bank.

“Part of my job is to integrate corporate equity derivatives into the mainstream equity cash business,” Ms Hecker explains.

Right place at the right time

UniCredit’s investment banking activities are spread across three centres. Syndication and market-facing functions are primarily in London, with origination more or less equally distributed between Milan and Munich. Munich is, of course, the home of HypoVereinsbank (HVB), acquired by UniCredit in 2005. UniCredit chief executive Jean Pierre Mustier announced this month that he is to step down in April. 

UniCredit’s HVB network in Germany has been integral to the bank’s recent ECM flurry. “It has given us a seat at the table with certain corporate clients, allowing us to get closer to issuers and better understand their capital needs,” Ms Hecker says. “So when the market came back in April and May, we were banging on the right doors.”

Part of my job is to integrate corporate equity derivatives into the mainstream equity cash business

Jana Hecker, UniCredit

Those doors often belonged to technology and e-commerce companies that were looking to raise funds. The convertibles market offered them two distinct advantages: one was that it was cheap; and the other, just as compelling, was that it was open.

Would-be borrowers needed additional liquidity to face the crisis, but the Schuldschein market, particularly important to unrated or non-investment grade borrowers in Germany and Italy, was temporarily unavailable.

“The Schuldschein market, which had been active prior to the crisis, closed for a couple of months,” says Matthias Janssen, UniCredit’s head of equity-linked products. Mr Janssen was previously co-head of ECM for Germany and Austria and, like Ms Hecker, took up his new job earlier this year.

“The convertibles market was open for both rated and unrated companies and, because the equity option subsidises the coupon, it allows them to raise funds at low cost,” Mr Janssen says.

Attractive terms

The Schuldschein market reopened in June. But as early as April, Italian paytech company Nexi was able to issue a €500m seven-year convertible bond — its first with UniCredit acting as a joint bookrunner. This was the largest equity-linked deal from an Italian financial services institution in the past 10 years.

Nexi needed to partially refinance the bridge for its acquisition of Intesa San Paolo’s merchant acquiring activities, agreed in December 2019. “Other asset classes were shut in March, so it decided to engage with the convertibles market,” says Francesco Pilardi, a director in UniCredit’s equity-linked unit. “As a potential growth company, it was able to get attractive terms.”

The bonds carried a 1.75% coupon and a 50% conversion premium. An accelerated book build of Nexi secondary shares was completed as a hedge for investors, with the final placing price serving as the reference price for the instrument. Both bonds and shares subsequently traded up.

“Strong investor demand for convertibles, generated from dedicated desks at both long-only institutional investment firms and hedge funds, stems from the instrument itself,” says Tareen Carmichael, head of equity-linked distribution, noting that investors benefit from a bond floor even if the underlying equity falls substantially. “So convertibles tend to outperform stocks in volatile periods.”

That is why, this year, institutions have been seeing fund inflows specifically earmarked for equity-linked investment, Mr Carmichael adds.

Hedge funds, which have been having their best year for some time, have been very active in this market. “Hedge funds have represented more than half of the demand in [convertibles] order books,” Mr Janssen says. “Another trend is wall-crossing, where a number of investors are approached to indicate acceptable terms — and usually more than half of those are hedge funds.”

Record highs

Another acquisition-driven deal, this time with UniCredit as joint global coordinator and bookrunner, was LEG Immobilien’s €550m convertible issue. Its eight-year maturity was Europe’s longest in 2020 to date.

LEG is one of Germany’s leading residential property companies, and the proceeds were used partly to pay for a portfolio of 7500 apartments. The deal was accompanied by a €273m equity offering and a €32m delta hedge placement. The coupon was 0.4% and the conversion premium 35%.

Though no target was specified, acquisition potential in a consolidating industry drove Delivery Hero’s bumper dual-tranche €1.5bn convertible issue in July. The German-headquartered local delivery business split the opportunistic deal equally between a five-year and a seven-year tranche.

With the share price near all-time highs, the bond was priced at the middle of the range, with 0.875% and 1.5% coupons respectively, and conversion premiums of 42.5% and 47.5%. Once again a delta placement, priced at a tight discount, was offered to allow investors to hedge their exposure without a potential negative impact on the share price.

The convertibles market was open for both rated and unrated companies and, because the equity option subsidises the coupon, it allows them to raise funds at low cost

Matthias Janssen, UniCredit

UniCredit was joint global coordinator and bookrunner, supporting Delivery Hero on both legs of the transaction. “This demonstrated once again the strength of our equity-linked franchise and unrivalled distribution power in cash ECM through our partnership with [brokerage firm] Kepler Chevreux,” Ms Hecker says.

Worldline, the French payments and transactional services business, was able to fund at significant negative yield with a €600m convertible issue in July. Demand from multi-strategy and outright investors allowed the zero-coupon deal to be increased from its original size of €500m. The conversion premium was 57.5%. UniCredit was joint bookrunner.

Europe’s largest semiconductor manufacturer, Swiss-based STMicroelectronics, was likewise able to issue at negative yield with a zero-coupon $1.5bn dual tranche convertible issue. Like Worldline, it has an investment grade rating and benefits from a demand for high quality paper.

One $750m tranche had a five-year maturity, while the other was a seven-year instrument. Conversion premiums were 47.5% and 52.5%, respectively.

Online boom

UniCredit was also joint bookrunner on an equally-split €1bn five- and seven-year convertible issue for Zalando, a Berlin-based online fashion and lifestyle platform that trades Europe-wide.

The company has benefited significantly from the Covid-prompted shift away from bricks-and-mortar retail to e-commerce, with quarterly gross merchandise volume up by one third in the second quarter of 2020.

“Zalando is a Covid winner, and saw the opportunity to grow even faster,” Ms Hecker says. As this was its first convertibles outing, an extensive wall-crossing exercise was conducted. One consequence was that the books were covered within 15 minutes of the launch of bookbuilding.

Coupons were 0.05% on the five-year bonds and 0.625% on the seven-year tranche, with conversion premiums of 42.5% and 50%, respectively.

The team is in discussions with other clients who are looking at this product and anticipates deals stretching into the first half of 2021. “We expect the market to remain active, though perhaps not as active as in the first half of 2020,” Mr Janssen says. “We will see some very large transactions.”

Ms Hecker expects an uptick in mandatory convertible deals. “We have been having more discussions on this theme,” she says. “We are seeing more recapitalisations coming through, and that goes with a pick-up in mandatory discussions.”

Hedge funds are a key market for mandatory convertibles. “They are quasi-equity with very high delta, and often price in an option volatility skew at maturity,” Mr Carmichael says. “That lends itself to hedge fund investors, who are able to delta hedge and arbitrage versus the options market. The demand will be there.”

So it has been a good year for the equity-linked team which, according to Ms Hecker, has come a long way in issuer and investor recognition alike. “I’m very proud of the team and the platform,” she says. “We have the right people in the right seats.”


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