Morgan Stanley gave Asia's shaky CB market a small lift yesterday (Wednesday) with the completion of a $260 million convertible for Taiwanese insurer Shinkong Financial.
The deal comes against a backdrop in which investors have lost a lot of money in the Asian CB market over the past two months and deal flow has almost dried up. Shinkong also had to contend with limited foreign ownership and almost no international research coverage despite its ranking as the country's second largest insurer with a fairly large $2 billion market capitalization and pretty standard 36% freefloat.
Both these issues, combined with a spectacular share price run-up, meant the order book was price sensitive and the deal size came in slightly below expectations for $300 million. Nevertheless, Shinkong managed to hit its targets for a negative yield structure and a fairly punchy 30% premium.
Final terms comprised an issue price of par, zero coupon and redemption price of 98.76% to yield minus 0.25%. This was the cheap end of a minus 0.25% to minus 0.75% range. There is also a two-year put option at 99.5%.
The conversion premium was fixed at 30% to the stock's NT$30.1 close compared to a range of 30% to 35%.
Underlying assumptions include a bond floor of 91.9%, implied volatility of 34.9% and theoretical value of 104.8%. This is based on a credit spread of 100bp over Libor, zero dividend, zero stock borrow and historic volatility of 50%. A 40% volatility assumption brings theoretical value close to par.
Observers say a number of the large CB funds particularly from Europe chose to sit on the sidelines, having been badly burnt over the past few months. However, those funds that did their homework were prepared to participate in size, with one order topping $100 million.
The fragility of CB sentiment meant the order book was fairly concentrated, similar to a deal for SK Telecom just over a week ago. With books two times covered, about 75 investors participated of which roughly 53% were from Europe, 41% from Asia and 7% offshore US.
Observers estimate that Shinkong is an implied low BBB rated credit at the holding company level. Nearly all its operating profit derives from the insurance industry and it has been recent regulatory changes, which have spurred the company's phenomenal share price performance.
Year-to-date, the company is up 32%. However, it is up about 300% since hitting NT$8 November 2003.
Since then the government has relaxed the rules on overseas investments by domestic insurers, in the process enabling groups like Cathay and Shinkong to reduce their negative spread problems. Shinkong has also started to broaden its reach, recently announcing its intention to acquire United-Credit Commercial Bank for about $150 million.
