Cable & Wireless Convertible Bond Gets Lukewarm Response
Updated: Tuesday, April 3, 2001 02:05 AM ET
By Alistair MacDonald
Of DOW JONES NEWSWIRES
(This story was originally published Monday)
LONDON (Dow Jones)--Asia is a hot spot for convertible bond issuance right now, but grey market prices Monday suggest Cable & Wireless PLC's (CWP, news, msgs) latest $1.5 billion issue is a bond too far.
The $1.5 billion bond is convertible into the shares of Hong Kong company Pacific Century Cyberworks (PCW, news, msgs). C&W said Monday it's selling its entire 14.7% stake - or 3.26 billion shares - in PCCW via the two-year zero-coupon exchangeable bonds.
Sure, market participants agree that a $1.5 billion Asian convertible bond is a significant deal. Not only is Asia a hot spot for issuance - Goldman Sachs says issuance in Asia year-to-date now stands at $3.3 billion, compared with $9.7 billion for the whole of 2000 - but this C&W issue is one of the biggest Asian convertibles ever, they say..
Still, investors aren't enamored of it.
For starters, many funds complain the bond offers little income. Also, market watchers doubt PCCW's shares have much potential and hedge funds may find it tough to borrow the stock to set up their positions. Only C&W shareholders are happy, as they anticipate a return of capital.
"It is not an interesting deal. There is little to be had from either the structure or the equity story," says Anja Eijking, fund manager at Achmea Global Investors.
PCCW already has one convertible bond in the market, having released a $1.1 billion bond in October 2000. But the issue sank on release due to a lack of confidence in PCCW's equity potential and its credit profile. It has traded below its issue price almost since and was trading at 85.5% of issue price around 1400 GMT Monday.
Five months on, investors are being asked to buy more bonds convertible into PCCW stock and outright investors, those who buy as a longer-term investment, are said to be showing little interest.
Because the bond will be issued and redeemed at par and has no coupon it offers little income, says Achmea Global's Eijking.
In addition, Eijking questions the Pacific Century Cyberworks equity story that underpins the bond.
"If C&W are getting out at these low levels it doesn't really fill you full of confidence over PCCW," she said.
PCCW Shares Down More Than 90%
PCCW has tumbled by more than 90% since it reached a peak of HK$27.859 in mid-February last year and some analysts don't think the decline is over.
Convertible investors pay a premium for the equity option embedded in their instrument. PCCW shares will have to gain by between 17.1% to 23.6% for the bond holder to profit on what they paid for equity.
With the bond maturing in just over two years, C&W and sole bookrunner UBS Warburg have not given the shares much time to appreciate.
The bond is also callable if the shares rise above 120% of their exchange price. If PCCW does confound the critics and shoot higher, bond holders will have their equity related upside capped.
Such zero coupon issues are often aimed at hedge funds who are less interested in straight income and more in arbitraging the difference between valuations of the bond and its underlying equity.
Hedge funds will like the credit rating, said David Rogers, fund manager at Axis Capital. With C&W rated A by Standard & Poor's Corp, hedge managers won't have to worry so much about credit risk.
But these funds also like to hedge out stock risk by shorting the underlying shares. Unfortunately for them, there isn't much PCCW stock-borrow around, making it a very difficult issue to short, said Axis' Rogers.
Despite the fact that UBS Warburg are said to be offering ways around the lack of borrow, hedge funds are still complaining of its absence.
Despite all this, C&W shareholders are happy.
At 1400 GMT, C&W shares were up 7.5 pence, or 1.6%, to 482.5 pence, in London-based trading.
Investors will be looking for some of the bond's proceeds to be returned to them, says Nigel Hawkins, analyst at Williams De Broe.
The issue will also take away C&W's exposure to the downside risk of Pacific Century Cyberworks.
(Richard Inder contributed to this report)
-By Alistair MacDonald, Dow Jones Newswires; 44 020 7842 9270; alistair.macdonald@dowjones.com
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