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Capital Markets Weekly: Equity supply increases including important test of appetite for Chinese risk

08 May 2020 Brian Lawson

A notable development this week has been the revival of new equity sales, including Southwest Airlines raising USD4 billion of common stock and convertible debt, arrangement of the largest rights issue in India to date, and a sizeable Chinese IPO, the first since the early March announcement of accounting problems involving Luckin Coffee which raised widespread market concerns about IPO disclosure standards.

Southwest Airlines

Southwest Airlines undertook an impressive USD6 billion funding package launched on 28 April, comprising USD2 billion each of common stock, convertible debt and conventional bonds.

The bond sale raised USD2 billion, comprising three and five-year debt with coupons of 4.75% and 5.25% respectively. The company plans to apply the bond proceeds to reduce borrowings under a 364-day credit agreement.

In parallel, it arranged an underwritten sale of five-year convertible debt, with a 1.25% coupon, with a conversion price of USD38.48 per share, a 35% premium. It also sold 70 million shares at USD28.5 each, increasing the equity sale from the previously announced volume of 55 million shares. The two operations can be increased under a "green-shoe" arrangement, permitting overallocation of an extra 8.25 million shares and USD300 million of convertible bonds. The new shares and convertible debt will be applied to general corporate purposes. The share sale is the largest US secondary equity offering in the last month, roughly doubling the USD1.04 billion previously raised by United Airlines.

In addition to the Southwest Airlines sale, Copa Holdings, a Panamanian airline firm also with sizeable presence in Colombia, also sold a USD350 million 4.5% 2025 convertible issue. The issue may be converted from October 2024 into common shares at USD51.66 per share, a premium of roughly 25%.

Reliance Industries

India's Reliance Industries (RIL) has undertaken an INR531 billion (USD7.1 billion) rights issue, India's largest rights issue to date, and the firm's first share-raising in some three decades. Shareholders were offered rights to buy one share at INR1257, a 14% discount to the close on 30 April, for every fifteen shares they hold, implying overall dilution of around 7%.

RIL is 50% owned by its Chair Mukesh Ambani and family relations as the firm's official promoters, who have announced their intention to purchase their INR26.56 billion share of the offering. RIL announced that this group also will purchase any shares left unsubscribed by other shareholders. Media sources explain that the rights-issue route is needed to permit the promotors' subscription in line with their holding share: under a qualified institutional placement they would have been limited to 5% of the offering.

The issue forms part of RIL's strategy of reducing its debt to a zero-debt target by 2021: the same goal also drove its recent sale of a 9.9% stake in its digital services unit Jio Platforms to Facebook for INR43.57 billion, and it is working on further disposals.

IPO supply

Norwegian video software conferencing firm Pexip is proceeding with its planned IPO. The deal is quite modest - with the company seeking to sell 17 million shares at NOK63 (USD6.06) each, and existing shareholders looking to sell the same volume, bringing the deal size to USD206 million. However, the offering is noteworthy as a relatively rare European IPO - especially during the COVID-19 pandemic - and for having conducted its investor meetings on its platform (a rival to Teams and Zoom) rather than by face-to-face meetings with potential investors. Chief Executive Odd Sverre Ostlie stated that there had been "some pushback" to this innovative marketing approach, but argued the route was "a super-efficient way of doing interactive meetings,", going on to claim that the decision to proceed reflected "massive interest" from potential investors.

Kingsoft Cloud is marketing a US targeted IPO, offering 25 million shares at USD16-18: the issue could reach USD518 million in proceeds if its 3.75 million share green-shoe is exercised. The deal is slated to price on 7 May: it represents the largest US IPO since GFL Environmental was floated at the start of March, and the first Chinese deal since recent disclosure problems were announced involving Luckin Coffee. The company currently has Kingsoft Group and Xiaomi as its main shareholders, with stakes of 53.7% and 15.8% respectively: the former's holding is slated to decline to 43.63% after the issue, leading to deconsolidation. Kingsoft Group is a Chinese software and internet services company listed in Hong Kong: it describes its core "pillars" as interactive entertainment, internet security and office software with cloud computing as "the new growth driver and source" of its business mix.

According to the preliminary filing, the two firms plan to purchase USD25 million and USD50 million respectively in the IPO, with French asset manager Carmignac Gestion cited as a potential buyer of USD50 million. Proceeds will be spent on upgrading infrastructure and new technology investments within Kingsoft Cloud.

Our take

This week's calendar indicates a wider improvement in primary equity markets, following recent sizeable issues by United Airlines and National Australia Bank.

RIL's deal is unusual, being driven by the company's aim to remove its outstanding debt through the combination of asset sales and share-raising, rather than a pressing need to reinforce its balance sheet, as applies to the recent airline deals and NAB's large placement.

The Kingsoft Cloud deal is an interesting test of market appetite, coming at a time of political disagreement between the US and China over allegations regarding COVID-19, which have triggered renewed fears of trade restrictions. Another important challenge is the fallout from recent accounting fraud in Luckin Coffee, a high-profile Chinese IPO which listed on Nasdaq in May 2019. In early April Luckin acknowledged the overstatement of its sales due to "fabricated transactions" worth CNY2.2 billion (USD310 million), and warned that its prior financial statements were unreliable, leading to the collapse in its share price: this now stands at USD4.39 versus a January 2020 peak of USD50 and the original flotation price of USD17.

Lastly, Pexip has taken a bold move by seeking to float during the current climate, although the company has claimed that it has already received "massive interest". Its marketing methods are interesting - removing the need for extensive investor visits before issue - and sets a useful precedent for remote marketing mechanisms. Since these can be conducted bilaterally through electronic platforms, this approach would seem a useful complement to conventional one-on-one meetings even after the COVID-19 pandemic.

Posted 08 May 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit



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