UPDATE-BA’s convertible bond flies off the shelves

July 17, 2009

*This post was updated after the bond priced*

British Airways unveiled a $1 billion fundraising aimed at securing its future earlier on Friday, including $540 million in bank loans that had been earmarked for its pension funds as a safety net against the airline going bust.

The fundraising also included a 350 million pound ($570.5 million) convertible bond, which was over 7 times covered, pointing to healthy investor appetite.

Convertible bonds have become an increasingly important source of finance for firms in Europe. The instrument allows companies to raise capital paying less interest than standard bonds, while avoiding an immediate dilution of earnings per share because investors look to gains in share prices over a medium term.

With European stocks rallying some 33 percent since early March, the convertible market has rebounded with year-to-date issuance reaching $16 billion including the BA deal, according to Thomson Reuters data.

The convertible was the third UK deal this year and BA’s first in 20 years. It was arranged by Barclays Capital, Deutsche Bank, HSBC, Merrill Lynch and RBS Hoare Govett.

The coupon of the 5-year convertible was priced at 5.8 percent, and a conversion premium of 37.6 percent.
The deal, which attracted strong support from both long-only funds and hedge funds, was priced after the issuer tightened the indicative range of the coupon to 5.5-5.875 percent, while the conversion premium was revised to 36- 38 percent. The deal was originally launched with a coupon range of 5.5-6.25 percent and a conversion premium of 30-38 percent.

BA’s convertible followed Air France’s 661 million euro deal launched on June 18.

Air France’s convertible, arranged by Societe Generale, UBS, BNP, Calyon and Lazard-Natixis, was 9 times covered on an original size of 575 million euros and increased 15 percent in size due to the good response.

Air France’s deal had a coupon of 4.97 percent and a conversion premium of 35 percent. In terms of implied volatility, a yardstick commonly used to measure how expensive a convertible is to investors, BA’s deal was priced at 30.6 percent, compared to Air France’s 27 percent.

Air France’s convertible, maturing 2015, has gained 8 percent since the launch to trade at 108, or 41 percent implied volatility, on Friday.

In the first half, convertibles in the EMEA region (Europe, Middle East and Africa) gained 16.6 percent, according to Barclays Capital. After a summer lull, equity capital markets bankers expect another rush of deals come September.

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