This is the largest convertible bond offering in EMEA since 2015 and through a mix of strategy with the Soft Call exercise, market timing of the new issuance and most market friendly features of the CB, ST was finally able to refinance US$1.2bn at 0%.
Photo of Giuseppe Amodio, STMicroelectronics, Javier Pollan, Citi, Giuseppe Notarnicola and Andrea Talpo, STMicroelectronics.
STMicroelectronics (ST) is a global semiconductor leader, designing and manufacturing intelligent and energy-efficient products which address the needs of a number of large markets: industrial systems, automotive applications, personal electronics including smartphones, and all types of IoT peripherals. ST enables innovation at both large global OEMs and more than 100,000 customers worldwide. In 2017, the company’s net revenues were US$8.35bn. ST is listed in Paris, Milan and New York.
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Largest convertible bond offering since 2015 in EMEA
Since 1998, STMicroelectronics (ST) has issued equity-linked instruments to finance its debt, taking advantage of the credit standing, the tech sector high volatility and the equity trend.
During 2017, the outstanding US$1bn convertible bonds (CB) issued in 2014 were “in the money”, given the recent impressive performance of the stock price. Therefore, in May 2017 ST began to receive conversions from bondholders and sounded the market to refinance the debt with a similar CB.
The new CB, was issued with the feature of Net Share Settlement which allowed ST to settle fully in shares, in cash or a mix of the two. On top of that, ST was in a position to exercise the soft call at 130% of the conversion price on the outstanding CB, forcing conversions to limit excessive dilution from further share price increase. At the end of June, ST issued a new US$1.5bn CB and contextually exercised the soft call on US$600m of the outstanding CB and announced the launch of a share buyback plan.
On 22nd June 2017, ST issued a US$1.5bn CB in two tranches of US$750m each for five and seven years maturity. The five-year tranche was issued at -0.25% YTM, while the seven-year tranche was issued at +0.25% YTM (average 0% on the full issuance). Both had a conversion premium of 37.5% and soft call at 130% non-callable three years and four years respectively for the first and second tranche.
Best practice and innovation
Despite the fact that ST could have managed the bond conversions from cash in hand, it decided to refinance the debt while forcing conversion of the previous issuance and launching a buyback for the shares underlying the new CB in order to almost totally offset the dilution.
The market window was favourable, with very positive share price performance (+150% from 1st January, 2016). Volatility levels were at a historic high and new equity-linked issuances in 2017 were well below the average of preceding years, creating a positive appetite for this asset class.
“Winning the award for us means a public recognition for a transaction which was outstanding from many viewpoints.”
Giuseppe Amodio, Head of Financial Risk Management, STMicroelectronics
Equity-linked investors holding previous ST’s CB could have taken the opportunity to roll over their investment in a new ST security upon the settlement of the previous convertible. The potential dilution of a traditional CB is limited by the net shares settlement innovative feature, namely the right for the issuer to decide the delivery of cash, shares or a mix of the two upon conversion.
The combination of this feature with the issuer soft call at 130% of the conversion price after an initial lock-up period, allowed treasury to easily determine the potential maximum number of shares to be delivered upon conversion.
ST launched a simultaneous share buyback for a maximum number of shares, almost completely offsetting the dilution on an equity issuance. After funding the buyback (completed with US$297m) and the first tranche of the previous CB, the size of the new issuance allowed to refinance also the second tranche. Net of the cost of the buyback, ST synthetically issued a straight debt in US$1.203bn for five and seven years maturities, at 0% yield to maturity.
ST was one of the only two issuers to achieve a negative yield at issuance in USD in EMEA (after LVMH, rated A+ versus ST rated BBB-) and the largest CB in EMEA since 2015 and was the fifth largest equity-linked (CB/EB) in the last five years in EMEA.
Only two transactions achieved a higher premium in USD since 2013.
The allocation book was oversubscribed multiple times, thanks also to the soft call exercise, by a majority of high-quality long-term investors.
Compared to a straight bond issued at around 3.5% Interest per annum for average similar maturities, ST saved more than US$40m per year.
ST rating was not impacted from the new CB issuance, maintaining a strong capital structure and net cash position, well recognised by rating agencies.
Head of Financial Risk Management
Giuseppe Amodio is the head of the Financial Risk Management department in the STMicroelectronics headquarters of Geneva. He is responsible for the financial markets activities of the group such as forex, interest rate risk and liquidity investments. He leads the hedging of extraordinary operations as M&A (eg equity participations hedging), capital markets debt issuance and manages the company listing on the different stock exchanges.