"In the current market environment, a transaction needs a relatively short maturity to be sure of getting done," says one observer. "What this example shows is that, although global markets may be volatile, deals can get still be executed well from certain countries, depending on the merits of the individual story.
"In Taiwan, it's also the case that the stock market has become less correlated to Nasdaq recently," the banker adds. "Since Chunghwa Picture Tubes closed the first deal from the country in early February, the Nasdaq has fallen 25%, but Taiwan has remained relatively stable, down a mere 3%."
Gigabyte itself, has been one of Taiwan's biggest outperformers, rising 97.22% year-to-date, closing Thursday at NT$106.5. Its convertible, nevertheless, has managed to secure a healthy 16% premium to a 10-day closing average, with a conversion price of NT$113.39. The five-year, par-priced deal has a zero coupon, zero yield and annual puts, with a $15 million greenshoe and a call option from year three subject to a 140% hurdle.
The syndicate, taking 25% of the overall book, comprises Barits Securities (Hong Kong) as co-lead and Citibank, Grand Cathay, ING Barings and Yuanta Securities as co-managers.
Geographical distribution saw 50% of the deal placed in Asia, 30% in Europe and 20% in the US. These ratios represent a turnabout from the recent past, where European placement has typically been the key component. However, with global investors retreating from volatile equity markets back to the relative safety of their own home markets, Asian investors have, in this instance, been able to pick up the slack thanks to strong demand from the region's private banking network.
Lead bankers, while unwilling to provide detailed breakdowns, say that a significant percentage of paper went into the private banking network, particularly in Hong Kong. European demand, by contrast, was largely driven by hedge funds, accounting for about 30% of the deal. Contrary to some suspicion that a large chunk of paper may have ended up on Asian prop desks, lead bankers re-iterate that this was not the case.
"There were two large orders for a total of $60 million, which we guessed were coming from prop desks, but they got significantly scaled back," says one. "In itself there is nothing wrong with this type of account so long as they keep the paper themselves. It only becomes a problem when prop desks start farming paper out to the same hedge fund clients the lead is also trying to reach."
Bankers also say that a second key component of Asian demand came from outright buyers, most of whom were prepared to look beyond the market's current uncertainty because of a positive view of the company's underlying equity story. Much of the Gigabyte's meteoric price rise this year, has been put down to the fact that it is likely to be a major beneficiary of moves by the world's second largest motherboard manufacturer, Intel, to scale back production.
"Motherboard manufacturers are also not cyclical stocks like DRAM manufacturers," one observer explains. It's a very cash generative business, which appeals to bond investors and the big Taiwanese manufacturers like Gigabyte and Asustek are all gaining market share, which is driving the share price forward.
"During 2000," the observer continues, "Gigabyte recorded massive volume growth, but was able to keep earnings stable because it's progressively transferring production to China where the cost base is much lower. In previous years, the company had to outsource as much as 40% of production because of the increasing pace of demand, but the China facilities are helping to reduce this figure."
Bankers also observe that the company's sales figures negate arguments that intra-regional trade is insignificant for Asian balance sheets. ""During 2000, 55% of Gigabyte's sales were to Asia, up from about 47% the previous year," one notes. "European sales, on the other hand, fell from 36% to 28%. Going forward, China will be an ever more important source of demand for the company and will insulate it from any global slowdown. This is because many economists are now postulating that Chinese growth will be increasingly domestically driven over the next decade."
Gigabyte is said to be unconcerned about the re-financing risks attached to its debut convertible. Despite the fact that the share price has risen so strongly this year, it is still half the level of its NT$175.86 peak last June. For investors, bankers also argue that the company is trading at an extremely low P/E ratio of 13 times 2000 earnings relative to historic levels in the mid 20 area.
Underlying credit assumptions for the deal further comprise a bond floor of 92.5, based on a spread of 300bp over Libor. Theoretical value is said to come at a roughly 105 level, with implied volatility of 22% against historic volatility at the high 60% mark.
