Passive components manufacturer Yageo Corp priced a $150 million convertible via UBS on Friday.
The five-year had a negative yield structure and was priced at par with a redemption price of 97.53%. There is also a put in year two at 99% to give a yield to put of minus 0.5%, the aggressive end of an indicative range between zero to minus 0.5%.
The premium was set at 15% to the stock's NT$14.9 close and there is a call option after six months subject to a 120% hurdle. The deal also has three re-sets, which take account of a recent rule change in Taiwan. Where before deals were re-set at the market price and an 80% floor, they now move down to the market price plus whatever the premium is.
Yageo's re-sets fall due in six months, one-and-a-half years and two-and-a-half years. There is also a 15% greenshoe.
Underlying assumptions comprise a bond floor of 89%, implied volatility of 26.5% and theoretical value of 103.5%. This is based on a credit spread of 325bp, zero stock borrow, full dividend protection and a volatility assumption of 35%.
The two stand-out aspects of the transaction are the low premium, especially when the re-sets are taken into consideration and the low bond floor. It is very unusual for investors to be willing to pay up to 11 points for a stock which has no borrow and a weak credit.
However, the deal closed seven times oversubscribed after books were opened for 45 minutes and about 105 accounts were allocated. Asset swap demand was said to account for only 10% of the total as Yageo Corp is viewed as an improving credit.
The company opted for a convertible even though it is keen to get equity onto its balance sheet, primarily because of the cost effectiveness of a negative yield structure. Year-to-date, the stock is up 65% but it has been weak over the past month and many analysts see only limited upside from current levels.
The company has, however, been able to improve gross margins from 20.5% in the first quarter to 27.1% by the end of the third thanks to a better product mix and corporate restructuring. This uptick is expected to continue through to the first quarter of 2004.
