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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
