With a fixed coupon of 2.5%, the five-year bullet deal has a conversion premium of 33% to a spot price of S$4.90 (27% to 33% indicated) and a yield-to maturity of 5.25%, against an indicative range that was revised from between 5.5% and 6% to 5.25% and 5.5%. There is hard no call for two years and thereafter subject to a 125% hurdle.
The revision of the yield-to-maturity lowered the bond floor from 92 to 90 and moved fair value to 110. Defending the fierce criticism which has been meted out by the rest of the street, lead officials say that the technical aspects of the deal were of less importance to investors than the fundamental credit story of a company which is pushing hard to catch up with Taiwanese foundry giants, TSMC and UMC.
"This was not a textbook convertible where valuation was determined by the kinds of technical measures looked at by hedge funds such as implied volatility, stock borrow and bond floor," one banker comments. "More time has been spent talking to journalists about the technical aspects of the deal over the past few days than to the sales force which have been concentrating instead on the underlying story."
Consequently, Merrill's argues that the 300 strong order book has an 80%/20% split in favour of outright buyers and equity funds on the one side and hedge funds on the other. By geography, allocations were split 20% Asia, 40% Europe and 40% US.
"There was a very high hit rate from one-on-ones conducted during the roadshow," the banker continues. "A large portion of the book comprised the top 50 biggest holders of Chartered scrip. A further significant percentage comprised investors that had sold out of the stock last year and were looking to get back in via a more defensive instrument."
The lead reiterates that most investment decisions centred on whether there will be a V or U shaped recovery for the tech sector and at what point accounts should re-engage the equity market. Chartered itself has said that it will report a profit loss for the first time in nine quarters and is currently experiencing a trough in capacity utilization, with the rate dropping from 102% on an annualized basis during 2000 to 60% for the first quarter of this year. Some analysts believe that the rate may yet fall a further 10%, diving past the company's previous 58% record low in the third quarter of 1998.
Proceeds are being used to build additional flexibility into the company's balance sheet as it finishes construction of its sixth wafer fabrication plant (fab) at a cost of $3.5 billion. With outstanding debt of $590 million pre-convertible and a debt to capitalization ratio of 27.6%, the company is starting to gear up its balance sheet in anticipation of a more aggressive push to catch up with TSMC and UMC.
Within a day of launch, the deal was said to be trading just up from issue price at 101.5 to 102. By contrast, the stock continued to fall, closing in Singapore at S$4.56. In New York the previous day, the stock had also cratered 12% to $26.9375, compared to an overall 2.8% rise for the Nasdaq.
This fall and the fact that 2.96 million ADR's were traded - the second highest on record for the past year - has led many observers to conclude that the deal was heavily placed with hedge funds, which had been active shorting the stock. Some also say that the 1.509 million ADR units available for stock borrow disappeared from the market about three weeks ago as a working mandate was first awarded and subsequently taken away from a second bank.
For Merrill Lynch, the completion and oversubscription of the deal are a vindication of the right strategy. One banker concludes, "The markets are very difficult at the moment, but they have been read right. It would've been very foolish to have gone out with overly aggressive terms when investors are being so cautious. Far better to generate momentum and then tighten the indicative levels back in as the book starts to build. This is a successful strategy for dealing with volatile markets."