A $450 million two-and-a-half year issue was launched yesterday (Wednesday) under the sole lead of Goldman Sachs, with pricing scheduled for either today or tomorrow. Terms comprise a par in par out structure with a zero coupon, zero yield and 22% to 27% conversion premium. The deal also has a one-year put at par and a downward re-set at the end of year one with an 85% floor. There is also a $90 million greenshoe.
Underlying assumptions comprise a bond floor around the 96.4% level with implied volatility of 22.9% to 25.1%. This is based on a credit spread assumption of 115bp over Libor, 4.5% stock borrow cost, zero dividend yield (there are full anti dilution provisions) and historic (100 day) volatility of 35.2% to 47.8%.
The structure of the deal is highly reminiscent of the zero coupon rolling put offerings so beloved of Taiwanese issuers during 2000 and provides the issuer with attractive terms subject to the re-financing risk inherent in the one-year put. From an investor's point of view, it is also a highly defensive structure, which incorporates the highest bond floor of any Taiwanese deal so far this year and a cheap equity option of only three-and-a-half points, which is also fully re-settable after one-year.
Observers say that the combination of a very strong credit rating of BBB+ and high bond floor are likely to make the deal extremely appealing to fixed income investors. How this will sit with outright accounts, however, will be tested by the overall demand generated since the high conversion premium and short maturity limit potential upside.
The deal will be convertible into either common shares or treasury stock and CDFH (China Development Financial Holdings) has been actively re-purchasing the former. The company recently said that it had already re-purchased 200 million shares and intends to buy back a further 80 million by the end of July.
With a current market capitalization of $5.1 billion, CDFH ranks slightly below Fubon's $5.4 billion level and lower still than Cathay's $8.6 billion level. However, because it has a huge 88% freefloat, there are a total of $4.4 billion shares outstanding in the market compared with $2.5 billion for Fubon and $4.1 billion for Cathay. Yet despite the large freefloat, observers say that volatility is well below the average of the tech stocks, which dominate the overall market.
CDFH is also an unusual animal with few global comparables. Established in 1959, the group is Taiwan's largest venture capital investor with an 80% market share. It was initially formed under the aegis of the country's Economic Stabilization Committee to provide long-term funding to key industries and has seeded and still owns stakes in many of today's largest market cap stocks particularly in the tech sector.
With 75% of its current investments in Taiwan, the group consequently has a high 70% correlation to the TWSE. In 1999, it was converted into an industrial bank named China Development Industrial Bank (CDIB), which in turn accounts for 95% of the revenues of the newly formed CDFH. For the 2001 Financial Year, CDIB also reported that 68% of its revenues stemmed from its direct investment activities, with 22% from commercial banking and 8% from investment banking.
CDFH has said that it now hopes to marry its venture capital investment activities with greater penetration of the brokerage market. The group is in the process of acquiring Grand Cathay Securities and is currently offering about $275 million for the 38% of shares it does not already own. The acquisition will boost the group's share of the domestic brokerage market from 0.1% to 2.3% and CDFH says it hopes to complete a couple more acquisitions that will lift its overall share to around 8%.
For both Goldman Sachs and the wider Taiwanese market a successful deal is extremely important. The large issue sizes and ever increasing numbers of potential financial holding company convertibles have weighed heavily on market psychology. The poor performance of the Goldman-led Cathay Financial deal of mid-May - still trading well below par - also means that CDFH will have to work all the harder to inject some momentum back.
