Chi Mei Optoelectronics was finally able to access the international equity markets late on Thursday Asian time with the completion of a $225 million convertible via lead manager Morgan Stanley. Getting funding locked in place for its 5G fab is likely to have come as a considerable relief to the world's fourth largest TFT-LCD manufacturer since it completely mistimed the sector's last cycle.
Having only listed on the domestic stock exchange last August, the company just missed a peak in panel prices, which had occurred a month earlier. It then saw its funding plans unravel as a severe price correction became mirrored in a share price contraction that saw it drop from NT$63 to NT28.3 in the space of four months. This made plans to follow AU Optronics onto the New York Stock Exchange extremely difficult to execute and although Morgan Stanley finally convened an analysts meeting for a 500 million new share issue just after Chinese New Year, pre-marketing was never started.
As one observer notes, "The company has made no secret of the fact that it would much rather have done an ADR than a convertible. But the market just isn't there for straight equity at the moment. It would have been far too risky to embark on two week roadshows given so much geopolitical uncertainty."
Instead, Morgan Stanley devised a novel equity-linked structure enabling the company to get equity onto its balance sheet, but completely perplexed the competition in the process. Viewed as a convertible, terms for Chi Mei's five-year deal are exceptionally cheap, incorporating one of the lowest conversion premiums on record and a nine-month put, the like of which has not been seen since a $200 million CB for Quanta Computer two years ago.
However, specialists say the transaction has to be viewed as a package, since many of the participating investors agreed to convert a significant proportion of their bonds straight away. Therefore, investors who knew they would have received equity at a discount through an ADR structure, agreed to pay a premium through partial immediate conversion of a convertible, because their remaining bonds have an extremely attractive valuation - the more so if Chi Mei still proceeds with plans for an ADR when the market picks up.
In a statement, the company concluded that, "investors that participated in the offering were interested in taking a sizeable equity exposure in the company. This offering gave them the opportunity to invest in size in the company, for which they were willing to pay a premium."
Terms comprise a zero coupon, zero yield structure with a 6.43% premium to a spot close of NT$29.70. There is a three year call subject to a 130% hurdle and a nine month put at par. The deal also has a $25 million greenshoe. Given that the deal was placed with investors interested in the equity story, there was no asset swap demand and no credit bid out in the market.
All that observers have been prepared to say is that the implied credit spread falls between 250bp to 300bp over Libor. With zero stock borrow, zero dividend yield and 60% historic volatility, this gives the deal an overall theoretical value of about 115%.
Between 10 and 20 investors participated in total, with about 65% comprising offshore Asian accounts. Some paper went into private banking accounts and observers say the exact amount immediately converted has still not been completely finalised, but is a minimum of $100 million. On full conversion, the deal equates to 15% of the enlarged share capital.
Under Taiwanese law, paper cannot be placed domestically, but most market participants believe the vast majority went to offshore vehicles of Taiwanese corporates looking to take a strategic stake in the company.
As one argues, "We had an investor who put a bid out in the market, but no-one hit the offer because there is no paper out there and no-one in the international market has access to any paper. Half the interdealer broker community didn't even know this deal had been priced. That's how murky the whole thing has been."
However, others have applauded the lead for enabling the company to secure the funding it needed in difficult market conditions. As the most heavily geared Taiwanese TFT-LCD producer, Chi Mei needed to get equity onto its balance sheet. According to ING research, the company runs an unconsolidated net debt to equity ratio of 154% compared to 46% for AU Optronics and an 83% industry average.
But as the largest and most vertically integrated Taiwanese producers, Chi Mei and AU both score highly in terms of capital efficiency. Chi Mei, for example, has an ROE of 17.2% compared to 6.9% for the sector at large, an ROA of 7.5% compared to 4% for the overall sector and ROIC of 8.5% compared to 4.4%.
It is also the most expensive by some margin, trading on a current valuation of two times price to book compared to a 1 to 1.2 times for all the other producers.
Following the completion of the convertible, the company says it is now examining other fundraising options and while it has no immediate plans for an ADR, is giving serious consideration to a rights offering.
