Key takeaways
    • Equity-linked markets globally – including in the UK – are undergoing a significant expansion as companies either look to recover from COVID-19 or grow their businesses further.
    • Appetite for the Equity-linked market has been driven by the flexibility that it offers corporates, as well as strong equity valuations.
    • A resurgent M&A market – fuelled by low interest rates and ample liquidity – is also driving primary issuance volume for convertible notes.
    • It is likely ESG will start permeating further into the convertibles world with a number of Green and Sustainability-linked issuances launched since the start of the pandemic, just as it has in other areas of the market.

    Whereas in 2019, Equity-linked issuances totalled c.USD80 billion, the market subsequently exploded in 2020, with issues exceeding USD150 billion for the first time in over a decade. 1 Activity in the UK Equity-linked market has been especially buoyant, as companies increasingly explore options offered by the capital markets, in addition to bank financing. HSBC looks in depth at how UK corporates are utilising the Equity-linked market.

    Revitalising sectors in recovery mode

    COVID-19 has had a devastating impact on a number of businesses throughout the UK. Particularly hard-hit are those organisations working in sectors such as physical retail; hospitality; leisure and travel. “A lot of companies have suffered from cash losses or a reduction in their financing options because of the pandemic. As a result, many are turning to Equity-linked markets. In the UK, we have seen a record amount of issuance of Equity-linked notes,” said Richard Lewis, co-head, Corporate Banking Origination, UK at HSBC. Lewis continued that a number of businesses are increasingly considering alternatives to bank or private placement funding, with COVID-19 quickening the trend seen in recent years, by exploring the debt and equity capital markets, which can provide a high degree of flexibility and substantial liquidity. “For those companies which have run into difficulties with their bank’s financing covenant terms, convertible bonds allow them to obtain covenant-lite or flexible terms, which can be more accommodative,” he added.

    A lot of companies have suffered from cash losses or a reduction in their financing options because of the pandemic and are turning to Equity-linked markets. In the UK, we have seen a record amount of issuance of Equity-linked notes.

    Richard Lewis

    Amid recent credit rating downgrades, and the length of time required to put in place a first time rating, many companies are eschewing the issuance of senior bonds, and are looking to access the Equity-linked markets- where there is no requirement for a credit rating.2

    Case study: WH Smith
    • HSBC acted as a Joint Global Coordinator, Paying and Conversion Agent and Trustee on WH Smith’s debut GBP327 million convertible bond and concurrent delta placing.
    • Alongside the convertible bond, WH Smith announced its first half results and a set of new financing arrangements, aimed at funding new growth opportunities and placing the company in a strong financial position to capitalise on the significant opportunities that are expected to emerge in the travel retail market post-COVID-19.
    • Proceeds from the convertible bond will be used to directly fund GBP50 million worth of investment into new store openings as well as repay approximately GBP275 million of existing debt.

    Ilyas Amlani, Managing Director, Head of EMEA Equity-linked at HSBC, said some previously implied investment grade companies with strong fundamentals – but which have been adversely impacted by COVID-19, are using Equity-linked markets to obtain cost-efficient funding, saving hundreds of basis points vs. more conventional financing routes. “Convertible issuances are quicker to execute and do not require prospectuses or roadshows, so they consume much less management time,” he said. This malleability makes the Equity-linked market a compelling source of financing for businesses, especially during fast moving, unpredictable crises such as COVID-19.

    Convertible issuances are quicker to execute and do not require prospectuses or roadshows, so they consume much less management time. UK institutional shareholders have become more supportive of convertible issuance recently.

    Ilyas Amlani

    Empowering sectors in growth mode

    Although COVID-19 has been ruinous and destabilising for many companies, others have flourished amid the crisis, namely the technology, healthcare and e-commerce sectors. “In the UK, there are has been a mix of equity linked issuers. On the one side we have typical users of convertibles, such as airlines, looking to access capital. At the other end of the spectrum, there are a number of new economy, high growth companies, in the technology, healthcare and e-commerce space, amongst others, who are tapping the markets to support their investment plans,” said Lewis. Emboldened by the ultra-low interest rates, these companies are tapping into the equity linked market to access cost-effective financing, with many of these issues also commanding increasingly high premiums. Moving forward, Amlani anticipated even more new economy firms in the UK could turn to Equity-linked markets for funding as they continue on their expansion drives.

    Case study: ASOS
    • HSBC acted as Joint Global Coordinator, Paying Agent, Conversion Agent and Trustee on ASOS’ GBP500 million Convertible bonds due 2026 and concurrent delta placing.
    • ASOS took advantage of its recent positive share price momentum to issue a GBP500 million debut Convertible bond, the company’s first public debt issuance. This transaction illustrates the attractiveness of the Convertible bond market to high growth companies, following recent issuances by fashion E-commerce peers in EMEA such as Global Fashion Group and Zalando. The deal is not only indicative of the attractive funding available for UK clients through the equity linked markets, but reinforces HSBC’s ability to support clients when tapping a variety of sources of financing across capital markets. The proceeds will provide ASOS with additional flexibility to continue to invest in its global growth strategy and refinance the acquisition of the Topshop brands completed in February 2021.

    “On the back of a strong technical backdrop, low coupons and attractive conversion premiums, UK institutional shareholders have become more supportive of convertible issuance recently. We have been actively engaging with them on new issues to ensure they understand both the risks and benefits. Typical downsides, such as potential dilution, have been more manageable given the current strength in equity valuations,” said Amlani.

    The Equity-linked market is evolving to incorporate the ESG trend. Just as we have seen the growth of sustainability-linked loans and green bonds, I expect the convertibles market will follow suit.

    Ilyas Amlani

    Similarly, convertible bond issuance is rising off the back of a very healthy M&A market in the UK, said Lewis. According to Mergermarket data, inbound M&A deals totalled GBP58.7 billion in the opening quarter of 2021, which is approximately three times higher than what it was in Q1 20203.

    “A large number of companies are sitting on cash, and they want to use that capital to pursue M&A deals in order to diversify into new markets; obtain better control of their supply chains; and respond to potential disruptors,” commented Lewis. Fuelling the heightened M&A activity even further is private equity, an alternative asset class currently managing a record USD5 trillion, and sitting on USD1.6 trillion of dry powder – an unprecedented amount. 4 As a result, institutional investors are calling on their private equity managers to execute deals. “From a private equity perspective, there is a lot of dry powder in circulation which is being used to fund acquisitions. We are seeing increasing cross-border investments in the UK by private equity firms. We are also seeing a large number of private equity assets coming to market which is driving activity, while in the UK, activity has been further boosted by the country’s successful vaccination roll-out,” said Lewis.

    We are seeing increasing cross-border investments in the UK by private equity firms. A large number of private equity assets is coming to market which is driving activity, while in the UK, activity has been further boosted by the country’s successful vaccination roll-out.

    Richard Lewis

    Driving innovation in the Equity-linked market

    As we emerge from the pandemic, Amlani anticipated the Equity-linked market’s approach to ESG (environment, social, governance) will continue to develop. This is being driven by the industry’s growing interest in ESG investing – combined with new global regulations such as the EU’s SFDR (Sustainable Finance Disclosure Regulation) focusing on sustainability. “Green and ESG are key areas of interest for us, and the Equity-linked market is evolving to incorporate this trend. Just as we have seen the growth of sustainability-linked loans and green bonds, I expect the convertibles market will follow suit. We have already seen the start of such issuance across Europe and we expect more to come” said Amlani.

    As a bank, HSBC’s Strategic Equity Finance (SEF) arm is at the forefront of supporting companies looking to access financing and is now ranked as a top two provider in EMEA and the top bookrunner for UK corporates. Amlani said the bank was now supporting more complex transactions, combining its equity-linked and derivative capabilities. “HSBC is playing a major role – especially here in the UK – in helping corporates tap into the Equity-linked market,” added Amlani.

    Setting HSBC apart from its peers is its deep pool of products and solutions which corporate clients can take advantage of. “HSBC is a one stop shop. There are some major lenders in the UK who, for example, have a strong Equity-linked markets business but might lack an equally strong leveraged finance or debt capital markets arm. HSBC has the entire suite of solutions,” commented Lewis. Amlani agreed. “It is not just the case that HSBC offers clients a diverse range of products, but it excels at them too,” he concluded.


    Related articles:

    For professional clients and eligible counterparties only.

    1 Source: Dealogic, Global issuance volumes in Equity-linked (Excluding China onshore and Japan)

    2 Global Capital (December 17, 2020) Convertible market looks to kick on after coming of age

    3 Private Equity Wire (April 19, 2021) UK M&A remained active in opening quarter of 2021

    4 Preqin (April 14, 2021) Private equity recovers after turbulent year

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