银洛希尔04年10月关于可转换债券交易品种的培训材料

18OCTOBER2004ConvertiblebondsPresentationtoAgendaOVERVIEWWhatareconvertiblebonds?ConvertiblebondstructuresExchangeablebondsEquity-linkedmarketconditionsArbitragetechniques2Whatareconvertiblebonds?ConvertiblebondsarehybridproductsWhatisaconvertiblebond?ConvertiblebondsarehybridinstrumentsthatstandsomewherebetweenadebtinstrumentandequityConvertibleiseffectivelyabondwhichgivesitsholderstherighttoconvertforafixednumberofordinarysharesatafixedpriceBondholdersreceive:Atmaturity,ifnotpreviouslyconverted,convertiblesareworth:ThegreateroftheircashredemptionvalueandThemarketvalueofthesharesintowhichthebondsareconvertibleFixedyieldtomaturity/yieldtoputCouponyieldwhereissuepricediffersfromredemptionorputprice…….orinexchangeforcancellingtheBonds……..BondFixednumberofsharesatafixedpriceShares4Trade-offofoptionvaluevsbondvalueConvertiblebonds-thecomponentsConversionpremiumVolatilityMaturityCallstructureDividendsInterestratesOption

Value5-15%BondValue

85-95%Maturity/PutInterestratesCreditspreadCouponRedemptionpriceHigheryieldHigherconversionpremiumMoredebt-likeLoweryieldLowerconversionpremiumMoreequity-like5Optionvaluationdrivers6Optionvaluationdrivers(cont’d)7Bondvaluationdrivers8Bondvaluationdrivers(cont’d)9ConvertiblefinancingoffersissuersanumberofadvantagesAdvantagesofconvertiblebondsLowcostdebtOptionvalueallowsIssuerstoachievesub-marketinterestrateBenefitsenhancedbyprevailinginterestrateenvironmentContingentequitysaleatapremiumEquityraisedatapremiumtoprevailingsharepriceNoimmediateEPSdilution-butimpactsfullydilutedRapidissuance2-4weekspreparation(subjecttoregulatoryapprovalprocess)PossibletoissuemorerapidlywithdelayedsettlementAcceleratedmarketingover1/2to1dayDemandsonmanagementLow;NoinvestorroadshowsFlexibilityVersatileproductcanbetailoredtoissuer’sneeds10DisadvantagesofconvertiblebondsDebtorequity?DebtonbalancesheetuntilconversionIssuerdoesnotcontrolconversionCostultimatelydependentonsharepricedevelopmentEquityimpactSharepriceusuallyfallsuponannouncementswitchingbyinvestorsfromequityshortsellingbyhedgefundswithdrawalofbuyersUsuallyrecoversrapidly11ConvertiblebondstructuresConvertiblesaresecuritiesthat,dependingonthestructure,mayhavecharacteristicsmoresimilartostraightdebtorequityConvertible-hybridspectrumSubordinatedconvertibleTypically10yearsTraditionalseniorconvertibleTypically5yearsPuttableseniorconvertible2-4yearputSubordinatedConvertible

Upto30yearswithorwithoutstep-upConvertiblePreferred

SubordinatedEitherlongdateddebt/perpetualand/orpreferredMandatoryConvertible

Redemptionincommonstock;typically3yearsEquityDebtNanyaTechnologyFormosaPlasticsShanghaiIndustrialShangri-LaASMLNumicoSwissReScottishPowerFortis(perpetual)BAESystems(preferred)DeutscheTelekomCreditSuisseEquity-likeconvertiblesDebt-likeconvertiblesLowercostoffundsvs.equity-likeproductsLargestmarketcapacityAggressiveexecutionsAddsdebttobalancesheet/debtforratingagenciesHighercostoffundsvs.debt-likealternativesPartialequitycreditfromratingagenciesLessrelevanttoNonJapanAsianissuers13GeneraloverviewNonJapanAsiaissuance-generalcharacteristicsConvertiblebondsinNonJapanAsiatypically:Areunsubordinatedandunsecureddebtwithnorestrictivecovenantsotherthannegativepledgeandcrossdefault

Have5yeartenorwithputsineitherthesecondorthirdyearofissueProvideinvestorswithrightstoconvertintolocalsharesorADRs/GDRs(ifany)atanytimeduringthelifeoftheinstrumentEnableissuertoforceconversionthroughsoftorhardcalloptions14GeneraloverviewNonJapanAsiaissuance-generalcharacteristicsCreditratingsTypicallynotratedStandardandPoorsmayimposepublicratingifof“keysignificance”Forlargesizetransactions,ratingspreferred(e.g.Formosa)ListingsTraditionallylistingonLuxembourgtomeetinstitutionalfundrequirementsDuetorecentEUTransparencyDirective,listingvenuechangedtoHongKongorSingaporeDistributionRegulationSdistributiononly144AdistributioninUSnotrequiredasUSconvertibleinvestorshaveoffshoreaccounts15StructuralcomparisonTraditionalcouponIssuedandredeemedatparvalue(100%)FixedandequalcouponswhichequaltheyieldtomaturityCallableatparafteraninitialnon-callperiodusuallysubjecttoahurdleConversionpremiumisconstant(nobondaccretion)Cheapdebt/lowyieldtomaturityHighprobabilityofconversionCouponsaretypicallytaxdeductible(dependingonjurisdiction)NoaccretingliabilitiesonputorredemptionStraightforwardandeasytomarketBroadestinvestorappeal(appealtofixedincomeinvestorsandprivatebanks)Cashpaycoupon–impactoncashflowprofileoftheissuerLowereffectiveconversionpricecomparedtopremiumredemptionstructureConsiderationsPros16StructuralcomparisonPremiumredemptionIssueatparvalue(100%)RedeematapremiumtoparreflectingyieldtomaturityandlowercouponCoupon,ifany,willbelowerthanforatraditionalcouponstructureCallableataccretingpriceafteraninitialnon-callperiodsubjecttoahurdleEffectiveconversionpremiumincreasesoverthelifeofthebondTypicallystructuredwithloworzerocouponPositivesharepricesignalBondaccretionandcoupon(ifany)aretypicallytaxdeductibleCashflowadvantageAccruedinterestisforfeitedonconversionRefinancingriskhigherasliabilitiesonlyfalldueatthebackendLesslikelytoconvertastheeffectiveconversionpriceistypicallymuchhigherthantraditionalcouponstructureHigherall-in-costifconvertiblesleftunconvertedConsiderationsPros17StructuralcomparisonNegativeyieldZerocouponandnegativeyieldgeneratingpositiveincometotheissuerEitherissueatparvalue(100%)andput/redeematvaluebelowpar(e.g.95%);orissueatapremium(e.g.105%)andput/redeematparBonddecretesovertimeresultinginfallingeffectiveconversionpremiumTypicallyshortdatedputs(e.g.Year1to2)PositivefundingcostDecliningdebtliabilityHighestprobabilityofconversionSignalstothemarketofastrongqualityissuerUsuallyrequireshort-datedputsandthusresultinhigherrefinancingrisksatputdatesAppealmosttoconvertiblebondsarbitrageinvestorswithlimitedinterestfromoutrightinvestorsNointerestfromfixedincomeinvestorsgiventhelackofyieldConsiderationsPros18StructuralenhancementsConvertiblescanbestructuredtoretainsubstantialflexibilityandmatchshortorlongtermobjectives19ExchangeablebondsWhatisanexchangeablebond?Exchangeablebonds:Similarinnaturetoconvertiblebonds-Bond+optionDifferencewithconvertiblebonds-underlyingstocknotissuer’sownsharesbutsharesofanotherentityinwhichtheissuerhasanequitystakeAnimportantfinancialtoolfordisposalofcorporateinvestmentsandforgovernmentprivatisationsProvensuccessinanumberofprivatisationsinItaly,France,Germany,Switzerland,MalaysiaandSingapore(e.g.TemasekEBintoSingTel)Acost-effectivemeansoffundingwhilstenablingissuertoexitcontingentlyatapremiumtothecurrentsharepriceInvestorstypicallyattachahighervaluationtoexchangeableaslowcorrelationbetweenequityriskandcreditenhancesvaluationExchangeablebondsaredebtinstrumentswhichallowinvestorstoexchangeintoanunderlyingstockotherthanthatoftheissuer21ExchangeablebondsinNonJapanAsiaInNonJapanAsiaduring2004YTDexchangeablebondshaveaccountedfor30%oftheequity-linkedmarket22ProsandconsiderationsofexchangeablebondsProsSellsharesatapremiumtocurrentsharepricewhileretainingcontrolanddividendsuntilexchangeLargesizeachievableExchangespreadoverlifeofbondstolimitimpactonmarketpriceDebtraisedatdiscountwithlowrunningyieldAccesstowideinvestorbaseConsiderationsUncertaintyofexchange–nodisposalifunderlyingstockdoesnotriseabovestrikepriceIssuerretainsdownsideriskonunderlyingsharesUS$interestpaymentsBalancesheetandtaximplications23Equity-linkedmarketconditionsIssuingenvironmentforconvertiblebondsOverviewSuitabilityofissuingenvironmentisdependentonanumberoffactorsincluding:EquitymarketsMarket/sharevolatilityInterestratesCreditspreadsInaddition,overalllevelofdemandfornewissuancerelativetosupplyofnewissuancewillimpactpricingthatcanbeachievedOptionpricingdriversDebtpricingdrivers25EquitymarketsSource:BloombergGlobalmarketshavegonethroughanumberofshortcyclesin2004Risingoilprices,disappointingUSemployment,consumerspendingnumbersandcautiousoutlookfor2005earningsgrowthimpactedinvestorconfidenceatthestartofQ3Rallyinrecentweeksastheoilpricefellback,andconsumerandbusinessspendingshowedcontinuedstrengthEquityperformance-2004YTDFavourableequitymarketsassistsentiment26MarketvolatilityIssuersofconvertiblebondswillachievebetterpricingintimesofrisingmarketvolatilityThehigherthevolatilitythegreatertheoptionvalueanissuercanachievefromtheconvertiblebondissueWhilstmarketvolatilityhasfalleninthelastfewweeksonanindividualstockbasismanyAsianvolatilitiesremainhighMarketvolatilitySource:BloombergVolatilitydrivesoptionpricing27InterestratesFedincreasedbenchmarkrateto1.75%on21stSept.andre-iteratedtheirstancethatrateswouldcontinuetoriseatameasuredpaceHoweverratesremainlowinahistoriccontextIntheshortertermrecentdatafromtheUShascombinedwithconcernsthatoilpriceswilllimitgrowthtopushratesto6monthlowsConvertibleissuanceinthenearfuture

offersagoodopportunitytolockintotheprevailinglowinterestrateenvironmentUSinterestrates(%)2001to2004YTDSource:BloombergAnissueatthecurrenttimewouldlockinfavourablerates28CreditSpreadsSource:BloombergCreditspreadsCreditspreadsaretheyielddifferentialbetweentheUSTreasuriesandcorporatebonds.Thewiderthecreditspreads,thehigherthecostoffinancingcorporateswillfaceSince2002,therehasbeenatighteningofspreadswhichisconducivetoboththedebtandconvertiblebondissuanceInNonJapanAsia,bankshavesignificantliquidityandthecreditspreadsinvestordemandforAsiancorporatesaretypicallyverytightTighteningofcreditspreadsassistsconvertiblepricing29CorporateshaveraisedalmostUS$90bngloballyin2004YTDwithNonJapanAsiaPacificexperiencingrecordlevelofnewissueactivitiesSupplyofconvertibles-newissuance2003wasarecordyearforglobalequity-linkedissuance-overUS$160bnwasraised.In2004YTD,therehasbeenaslow-downinnewissueactivitiesinEuropeandtheUSAsaresult,investor’sdemandspilledovertotheAsiaPacificregion-withbothNon-JapanAsiaandJapanexperiencingrecordlevelofissuanceIndiancorporateshavebeenmainbeneficiariesofthisasmanyopportunisticallytappedtheconvertiblemarketandachievedveryaggressivetermsGlobalissuancebyyearSource:EquityWare30Investors’demandforconvertiblesConvertiblesinNonJapanAsiahaveprovidedinvestorswithsteadyreturnsrelativetoequitiesoverthepastyearsIn2004,however,annualisedreturnsarepositivebutlow(+1.5%)relativetohistoricnormsWhilstpricesensitivityhasincreased,convertiblefundsstillhavemoneytoinvestgiventherelativelackofglobalCBissuancein2004YTDandarereceptivetonewinvestmentopportunitiesEquityandequity-linkedreturnsSource:BloombergConvertibleshavehistoricallyprovidedconsistentreturnsforinvestorsandtheirdefensiveinvestmentprofilehascontinuedtoattractinflows31RecentNonJapanAsiaconvertiblebondissuesAfteraquietsummer,markethasseenrenewedactivitywiththepricingof5dealsinSeptemberSource ABNAMRORothschild,Equityware.FinanceAsiaNote Deals>=US$50m.Asof13October2004RecentNonJapanAsiaconvertiblenewissues-recentperformance32ArbitragetechniquesOverviewOutrightInvestorstakeadirectionalviewonacompanyandholdconvertiblebondswithnocreditorequityhedgeInvestorsbenefitfrom: -risingsharepriceasoptionvalueincreases -risingvolatilityasoptionvalueincreases -fallingcreditspreadsasfixedincomevalueincreases -fallinginterestratesasfixedincomevalueincreasesConvertiblebondoffersdownsideprotectionrelativetoastraightequitypositionArbitrageInvestorscanhedgeoutcreditrisk,equityriskorbothUltimatelylooktoholdeither:

-optioncomponentofconvertiblebondswhilsthedgingoutcreditrisk;or -longvolatilitypositionbyhedgingoutcreditriskandshortsellingsharesIncertaincountriesshortsellingisdifficultandcredithedgethereforebecomesmoreimportantInvestors

canapproachconvertibleinvestingfromanoutrightperspectiveoronanarbitragebasis34Convertiblearbitragestrategy

WherepossiblethemajorityofconvertibleinvestorswilllooktohedgeoutpartofconvertibleexposureTherearethreemainhedge-ableriskcomponents: (i)sharepricerisk; (ii)creditrisk; (iii)interestraterisk.CreditriskandinterestrateriskcanbesimultaneouslyhedgedintheformofanassetswapwhichistheusualformofcreditprotectionintheAsianmarketInEuropeanmarketitismoreusualtohedgecreditbybuyingcreditdefaultswapsandtakingaportfolioapproachtohedginginterestrateexposureSharepriceriskcanbehedgedbyshortingstocktotheextendimpliedbythedelta(calculatedfrompricingmodels)Alternativelyinvestorscantakeanoutrightstockviewbyeithershortinglesssharesthanrequiredtheoreticallyinordertohaveapartiallongpositionorshortingmoresharesthanrequiredtohavepartialshortposition35Stockriskhedging

DeltaHedgeThedeltaonaconvertiblebond(ortheoptioncomponentofaconvertiblebond)istheexpectedchangeintheconvertiblepriceforagivenchangeinthepriceoftheunderlyingassetAconvertiblewithadeltaof0.5wouldthereforetheoreticallyincreaseinpriceby0.5%forevery1%increaseintheunderlyingequityandviceversaThesizeofthedeltadependsontheoptionvaluationdrivers:thedifferencebetweenthecurrentsharepriceandtheconversionpricevolatilitydividendsstockborrowcostsmaturity/callprotectionAdeepinthemoneyconvertiblewillhaveadeltaapproaching1whichwouldnecessitateashortpositionof1-for-1withtheconversionrightsofeachbondAnout-of-the-moneyconvertiblemayattractnoshortstockpositionwhatsoever.Sharepriceriskislimitedbyaprocessknownasdeltahedging-thisrequiresabilitytoshortsellandliquidtradinginunderlyingasset36Credithedging–creditdefaultswap

Twotypesofderivativesareusedforhedging–investorsarecurrentlysensitivetothelevelofcredithedgeavailableonconvertibletransactionsCreditDefaultSwapAcreditdefaultswap(“CDS”)isacreditderivativetransactionwhichallowstheholdertoputthebondsbacktothewriteroftheoptionatfacevalueintheeventofadefaultThewriteroftheCDSreceivesaquarterlyfeefromthebuyerinexchangeforacceptingcreditriskThebuyerreceivesnothingunlessacrediteventoccursAsianCDSmarketisnotwelldevelopedandCDShedgingisthereforelimited37Credithedging–assetswap

Twotypesofderivativesareusedforhedging–investorsarecurrentlysensitivetothelevelofcredithedgeavailableonconvertibletransactionsAssetSwapAssetswappingsplitsabondintoitstwoseparatecomponents–bondandoptionThesecomponentsarepurchasedbyinvestorsseekingseparatereturnprofiles,namely,creditinvestorsandoptioninvestorsComponentscanbereassembledatanytimeattheoptionoftheoptionholderCreditbuyerbuysconvertibleatparandentersinterestrateswapwitharrangingbank(ABN)–investorthereforepaysfixedcouponstoABNandreceivesfloatingNPVofswaptoABNisnegativebutABNretainsanoptiontorepurchasewholepackageatparplusaccruedinterestOptiontorepurchaseconvertiblebondat100%issoldtooptioninvestor38DisclaimerThispresentationhasbeenpreparedbyABNAMRORothschild(“AAR”),anunincorporatedjointventurebetweenABNAMROBankN.V.andNMRothschild&SonsLimitedexclusivelyforthebenefitandinternaluseoftheclientnamedonthecoverinordertoindicate,onapreliminarybasis,thefeasibilityofapossibletransactionortransactions.Thispresentationisincompletewithoutreferenceto,andshouldbeviewedsolelyinconjunctionwith,theoralbriefingprovidedbyAAR.ThepresentationisproprietarytoAARandmaynotbedisclosedtoanythirdpartyorusedforanyotherpurposewithoutthepriorwrittenconsentofAAR.Theinformationinthispresentationreflectsprevailingconditionsandourviewsasofthisdate.Inpreparingthispresentation,wehaverelieduponandassumed,withoutinde