Handbook of Corporate Equity Derivatives and Equity Capital Markets E-Book

Juan Ramirez

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Finance Series
• Sprache: Englisch
• Veröffentlichungsjahr: 2011

Seitenzahl: 845

Beschreibung

Equity strategies are closely guarded secrets and as such, there is very little written about how investors and corporate can utilise equity vehicles as part of their growth strategies. In this much-needed book, industry expert Juan Ramiraz guides readers through the whole range of equity derivative instruments, showing how they can be applied to a range of equity capital market situations, including hedging, yield enhancement and disposal of strategic stakes, mergers and acquisitions, stock options plan hedging, equity financings, share buybacks and other transactions on treasury shares, bank regulatory capital arbitrage and tax driven situations. The book includes case studies to highlight how equity derivative strategies have been used in real-life situations.

Leseprobe

Contents

Cover

Series

Title Page

Copyright

Dedication

Preface

About the Author

1: Main Strategic Equity Derivative Instruments

1.1 EQUITY FORWARDS

1.2 EQUITY SWAPS

1.3 STOCK LENDING AND BORROWING

1.4 CALL AND PUT OPTIONS

1.5 Dividend Swaps

1.6 VARIANCE SWAPS AND VOLATILITY SWAPS

2: Equity Capital Markets Products

2.1 MAIN EQUITY CAPITAL MARKETS PRODUCTS

2.2 INITIAL PUBLIC OFFERINGS

2.3 CASE STUDY: GOOGLE'S DUTCH AUCTION IPO

2.4 RIGHTS ISSUES (OR RIGHTS OFFERINGS)

2.5 RIGHTS ISSUES OF CONVERTIBLE BONDS

2.6 ACCELERATED BOOK-BUILDINGS

2.7 AT THE MARKET OFFERINGS

3: Convertible Bonds and Mandatory Convertible Bonds

3.1 INTRODUCTION TO CONVERTIBLE BONDS

3.2 WHO BUYS CONVERTIBLE BONDS?

3.3 CONVERTIBLE BONDS: THE ISSUER PERSPECTIVE

3.4 CASE STUDY: INFINEON'S CONVERTIBLE BOND

3.5 DELTA SHARE REPURCHASE STRATEGY

3.6 MANDATORY CONVERTIBLE BONDS

3.7 RATIONALE FOR ISSUING MANDATORY CONVERTIBLES

3.8 RATIONALE FOR INVESTING IN MANDATORY CONVERTIBLES

3.9 FIXED PARITY MANDATORY CONVERTIBLES

3.10 VARIABLE PARITY MANDATORY CONVERTIBLES

3.11 DIVIDEND ENHANCED CONVERTIBLE SECURITIES

3.12 CASE STUDY: UBS's DECS

3.13 SPECIAL CLAUSES IN CONVERTIBLES

3.14 CONTINGENT CONVERTIBLES: FRESHES, CASHES AND ECNS

4: Strategic Equity Transactions around Convertible/Exchangeable Bonds

4.1 ISSUING AN EXCHANGEABLE WITH A THIRD-PARTY GUARANTEE

4.2 ISSUING A CONVERTIBLE THROUGH A THIRD PARTY

4.3 CRYSTALLIZING A GAIN IN A CONVERTIBLE INVESTMENT THROUGH WARRANTS

4.4 MONETIZING A STAKE WITH AN EXCHANGEABLE PLUS A PUT

4.5 INCREASING LIKELIHOOD OF CONVERSION WITH A CALL SPREAD

4.6 DECREASING LIKELIHOOD OF CONVERSION WITH A CALL SPREAD

4.7 DOUBLE ISSUANCE OF EXCHANGEABLE BONDS

4.8 BUYING BACK CONVERSION RIGHTS

4.9 BUYING BACK CONVERTIBLE/EXCHANGEABLE BONDS

4.10 PRE-IPO CONVERTIBLE BONDS

5: Hedging and Yield Enhancing Strategic Stakes

5.1 HEDGING A STRATEGIC STAKE

5.2 YIELD ENHANCEMENT OF A STRATEGIC STAKE

6: Disposal of Strategic Stakes

6.1 MOST COMMON DISPOSAL STRATEGIES

6.2 DETERMINISTIC DISPOSAL STRATEGIES

6.3 ENHANCED DISPOSAL STRATEGIES

6.4 DERECOGNITION STRATEGIES

6.5 COMBINATION OF ABB AND A CALL OPTION/EXCHANGEABLE

7: Strategic Equity Derivatives in Mergers and Acquisitions

7.1 KEEPING VOTING RIGHTS IN PROXY CONTESTS

7.2 SUBMITTING RESOLUTIONS TO AN AGM

7.3 INCREASING LIKELIHOOD OF SUCCESS OF A MERGER ARBITRAGE POSITION

7.4 AVOIDING MANDATORY OFFER RULES

7.5 INCREASING LIKELIHOOD OF SUCCESS OF A TAKEOVER

8: Stock Options Plans Hedging

8.1 MAIN EQUITY-BASED COMPENSATION PLANS

8.2 IFRS ACCOUNTING FOR EQUITY-BASED COMPENSATION PLANS

8.3 CASE STUDY: ABC'S ESOP AND SAR

8.4 MAIN ESOP/SAR HEDGING STRATEGIES

8.5 HSBC'S PERFORMANCE SHARE PLAN

9: Equity Financings

9.1 CASE STUDY: EQUITY COLLATERALIZED BOND

9.2 SALE + EQUITY SWAP

9.3 PREPAID FORWARD + EQUITY SWAP + PLEDGE

9.4 REPO FINANCING

9.5 STOCK LOAN FINANCING

9.6 PUT FINANCING

9.7 COLLARED FINANCING

9.8 REVOLVING MARGIN LOAN FACILITIES

10: Share Buybacks and Other Transactions on Treasury Shares

10.1 OPEN MARKET REPURCHASE PROGRAMS

10.2 ACCELERATED REPURCHASE PROGRAMS

10.3 VWAP-LINKED REPURCHASE PROGRAMS

10.4 PREPAID COLLARED REPURCHASE PROGRAMS

10.5 DEEP-IN-THE-MONEY CALL PURCHASE

10.6 ASIAN CALL PURCHASE

10.7 PUBLICLY OFFERED REPURCHASE PROGRAMS

10.8 PUBLIC OFFER OF PUT OPTIONS

10.9 PRIVATE SALE OF A PUT OPTION

10.10 ACQUISITION OF SHARES WITH A RANGE ACCRUAL

10.11 OTHER TRANSACTIONS ON TREASURY SHARES

11: Bank Regulatory Capital

11.1 AN OVERVIEW OF BASEL III

11.2 TIER 1 CAPITAL

11.3 TIER 2 CAPITAL

11.4 DEDUCTIONS FROM COMMON EQUITY TIER 1 CAPITAL

11.5 OTHER CAPITAL BUFFERS

11.6 TRANSITIONAL ARRANGEMENTS

11.7 LEVERAGE RATIO

11.8 LIQUIDITY COVERAGE RATIO

11.9 NET STABLE FUNDING RATIO

11.10 CASE STUDY: CALCULATION OF MINORITY INTERESTS

11.11 CASE STUDY: CREATING MINORITY INTERESTS

11.12 CASE STUDY: REDUCING RISK WEIGHTING

11.13 CASE STUDY: RELEASING COMMON EQUITY

11.14 CASE STUDY: REDUCING AN UNCONSOLIDATED FINANCIAL STAKE

11.15 CASE STUDY: COMMERZBANK'S CAPITAL STRUCTURE ENHANCEMENT WITH CREDIT SUISSE

Bibliography

Index

For other titles in the Wiley Finance series please see www.wiley.com/finance

This edition first published 2011

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Library of Congress Cataloging-in-Publication Data

Ramirez, Juan, 1961– Handbook of corporate equity derivatives and equity capital markets / Juan Ramirez. p. cm. — (The Wiley finance series) Includes bibliographical references and index. ISBN 978-1-119-97590-8 1. Derivative securities—United States. 2. Options (Finance)—United States.I. Title. HG6024.U6R36 2011 332.63′2—dc22 2011016272

A catalogue record for this book is available from the British Library.

ISBN 978-1-119-97590-8 (hardback) ISBN 978-1-119-97855-8 (ebk) ISBN 978-1-119-95077-6 (ebk) ISBN 978-1-119-95078-3 (ebk)

To my wife Marta and our children, Borja, Martuca and David

Preface

This book tries to fill a gap in the financial literature. I was always frustrated by the lack of public information available on strategic equity. However, it is not surprising. Strategic equity transactions take place behind Chinese walls because often these transactions are highly confidential and market sensitive. Sometimes, investment banks and their clients try to avoid publicly disclosing a strategic equity transaction when it is part of an M&A transaction or aimed at circumventing specific accounting, tax and/or regulatory treatments.

The objective of this book is not to provide an exhaustive guide on strategic equity solutions. There are infinite possibilities in structuring strategic equity deals with different features in order to achieve a strategic objective. Instead, this book tries to be a useful reference and source of ideas. Although no two strategic equity transactions are the same, there are common threads that run through most strategic equity transactions (see Figure 0.1). This book is a summary of my work helping senior corporate and financial institutions executives to make sound strategic equity decisions in the following situations:

Equity capital markets situations, especially regarding convertible bonds and mandatory convertible bonds.Hedge, yield enhancement and disposal of strategic stakes.Mergers and acquisitions.Stock options plan hedging.Equity financings.Share buybacks and other transactions on treasury shares.Bank regulatory capital arbitrage.Tax-driven situations.

Figure 0.1 Main strategic equity transactions covered.

I strongly recommend this book to:

CFOs and treasurers of corporations who are about to make a strategic equity decision. This book will help to devise a value-maximizing strategy and to assess if the entity is able to bear the risks associated with its implementation. This book is also useful in making an independent evaluation of the merits and risks of proposed structures to the company by its investment banks.Equity derivatives, equity capital markets and corporate finance professionals at investment banks looking to identify new strategic equity opportunities to sell to clients, to propose to clients innovative solutions and/or to quickly gain a specialized expertise in the strategic equity field.Equity and credit research analysts looking to better understand the rationale behind a particular strategic equity transaction entered into by an entity. This book can be useful to identify potential risks stemming from the transaction.Private equity firms and hedge funds looking to profit from a specific strategic situation of a company. This book can provide ideas about how to maximize profit while reducing the associated risk.Accounting professionals who are looking to understand a financial transaction before deciding its accounting treatment. This book can be useful to suggest a change in the product profile so a more favorable accounting treatment can be applied.Legal/tax professionals who are involved in strategic equity transactions and who are looking to gain a deeper knowledge of these transactions. This book can also help to devise a certain solution with a more favorable legal/tax treatment.MBA students who are looking to broaden their financial knowledge. This book complements some of the financial courses taught in an MBA, such as corporate finance, financial derivatives and strategic management. This book can also be useful to MBA students seeking an equity derivatives or equity capital markets position at an investment bank, or a position in the treasury or strategic development team of a corporation.

Besides its financial orientation, the book has two important objectives: to be practical and easy to read. In order to achieve the first objective, the book uses an extensive number of cases, many of them real situations. In order to achieve the second objective, I have also included around 200 figures (yes, I am a bit of a masochist). I hope that the reader finds this book a useful reference.

The opinions expressed in this book are those of the author alone and do not reflect the positions of the banks in which he has been implementing his equity derivatives practice.

About the Author

Juan Ramirez currently works in an international bank and is responsible for the marketing of strategic derivatives to the Iberian corporate and institutional clients. After earning a bachelor degree in electrical engineering at the ICAI University in Madrid, he joined the consumer products group at Arthur Andersen where he spent five years gaining a substantial exposure to the accounting world. After earning an MBA degree from the University of Chicago, Mr Ramirez moved to London to work at Chase Manhattan (currently JP Morgan). He has also worked at Lehman Brothers, Barclays Capital and Banco Santander.

Mr Ramirez has devoted more than 15 years to marketing structured derivatives solutions. During the last seven years he has been working in strategic equity transactions with a strong accounting, capital markets, tax and regulatory angle. Mr Ramirez is married and has three children.

1

Main Strategic Equity Derivative Instruments

This chapter provides a good understanding of the equity derivative instruments most widely used by equity derivatives professionals. This is the most complex and technical chapter of this book. It aims to solidify the reader's technical knowledge of these instruments. I have also tried to emphasize the practical aspects of these instruments when applied to strategic equity transactions. I start with a discussion of less complex instruments such as equity forwards and equity swaps. I continue covering stock lending transactions – although not derivative instruments, they nonetheless are a key component of strategic equity transactions. Options are addressed next, starting with the basics and progressing to an explanation of option sensitivities and delta-hedging. Finally, I include more specialized equity derivative products such as dividend swaps, variance swaps and volatility swaps.

1.1 EQUITY FORWARDS

1.1.1 Equity Forwards

Equity forwards allow an investor to take bullish or bearish views on an underlying stock, a basket of stocks or a stock index.

A physically settled equity forward is an agreement between two counterparties whereby one counterparty – the buyer – agrees to buy from the other counterparty – the seller – a specified number of shares of a specified stock or basket of stocks, at a specified time in the future – the settlement date – at a pre-agreed price – the forward price. This instrument is called a physically settled forward, because the underlying shares are delivered by the seller to the buyer. The buyer and the seller pay no upfront premium to enter into the equity forward.A cash-settled equity forward is an agreement between two counterparties whereby one counterparty – the buyer – receives at a specified time in the future – the settlement date – from the other counterparty – the seller – the appreciation of the underlying stock, basket of stocks or stock index, above a pre-agreed price – the forward price. Conversely, the seller receives from the buyer the depreciation of the underlying below the forward price. This forward is called a cash-settled forward, because no underlying shares are delivered to the buyer at maturity. Only cash is paid by one party to the other. The buyer and the seller pay no upfront premium to enter into the equity forward.Often a forward can be both cash-settled and physically settled, giving one of the two counterparties the right to choose the type of settlement just prior to maturity.

An equity forward agreement is formalized through a confirmation. The confirmation is generally legally subject to the terms and clauses of the International Swaps and Derivatives Association (ISDA) Master Agreement signed between the two counterparties. As its name suggests, once signed, the Master Agreement governs all past and future individual derivative transactions entered into between the two counterparties.

1.1.2 Example of a Cash-settled Equity Forward on a Stock

Let's assume that our entity ABC Corp. has a positive view on Deutsche Telekom (DTE) stock for the next three months. As a result, ABC is considering entering into an equity forward. As seen earlier, a forward can be either physically settled or cash-settled. In a physically settled equity forward the buyer will pay to the seller an amount equal to the forward price multiplied by the number of shares, and the seller will deliver to the buyer the number of shares. In a cash-settled forward the appreciation or depreciation of the shares relative to the forward price is exchanged between the two counterparties. Because ABC is not interested in receiving DTE shares at maturity, ABC enters into a 3-month cash-settled equity forward on 10 million shares of DTE, with the following terms:

Equity Forward Main TermsBuyerABC Corp.SellerGigabankTrade date20-September-20X1SharesDeutsche TelekomNumber of shares10 millionForward priceEUR 15.00Settlement priceThe closing price of the shares on the valuation dateValuation date20-December-20X1ExchangeEurexSettlement methodCash settlementCash settlement amountThe absolute value of: With the convention that:Settlement date23-December-20X1 (three exchange business days after the valuation date)

During the life of the equity forward, the flows between the two counterparties are the following.

At inception, the forward agreement is signed by the counterparties. No flows take place, as the buyer and the seller pay no upfront premium to enter into the equity forward.

Until maturity of the forward, no flows take place.

At maturity, the “settlement price” will be calculated on the “valuation date”. In this example, the settlement price is the closing price of DTE stock on 20 December 20X1 (i.e., the valuation date). Immediately after, the “cash settlement amount” will be calculated as the absolute value of the product of (i) the “number of shares” and (ii) the difference between the settlement price and the forward price. Three potential scenarios may take place:

If DTE stock has appreciated relative to the forward price (i.e., the settlement price is greater than the forward price), ABC would receive from Gigabank the stock appreciation times the number of shares (i.e., the cash settlement amount) on the settlement date.Conversely, if DTE stock has depreciated relative to the forward price (i.e., the settlement price is lower than the forward price), ABC would pay to Gigabank the stock depreciation times the number of shares (i.e., the cash settlement amount) on the settlement date.If DTE stock has ended up at the same level as the forward price (i.e., the settlement price is equal to the forward price), no cash flows take place.

Let us assume that on the valuation date (20 December 20X1), DTE stock closes at EUR 18.00. The settlement price would then be EUR 18.00. ABC would receive from Gigabank EUR 30 million [= 10 million shares × (18.00 – 15.00)] on the settlement date (23 December 20X1).