Joint bookrunners Credit Suisse First Boston and JPMorgan completed a $200 million convertible for TFT-LCD manufacturer Chi Mei Optoelectronics yesterday (Thursday). The deal was executed within the space of 90 minutes, closing two-and-a-half times oversubscribed on demand of $500 million.
Given that general market conditions have softened over the past few days, terms were considered aggressive and reflected fierce re-bidding for the mandate, which took place over the weekend. The transaction was originally held by Chi Mei's traditional house bank Morgan Stanley, which has executed both of the company's previous equity-linked deals this year. However, its role as joint bookrunner for the NYSE listing of rival Korean producer LG Philips LCD marked a clear conflict of interest, which led to the change in leads.
Terms on the new deal comprise a five-year final maturity, zero coupon, par redemption structure. There is a put at one-and-a-half years at 100.752% and year three at 101.509% to give a yield-to-put of 0.50%. The deal is also callable after two years subject to a 115% hurdle.
The conversion premium came towards the low end of an indicative range between 28% and 33%, to be set at 28% to the stock's NT$34 close. There is also a $50 million greenshoe.
Underlying assumptions comprise a bond floor of 96.2%, theoretical value of 102.7% and implied volatility of 28%. This is based on a credit spread of 150bp over Libor, zero dividend, zero stock borrow and volatility assumption of 35%.
One of the most striking aspects of the deal is the credit spread, which exactly mirrors that of a $175 million exchangeable a month-and-a-half ago. However, whereas the June deal was for the parent company Chi Mei Corp, which has an implied BB rating, the current deal is for Chi Mei Optoelectronics, which has an implied single B rating.
Observers say that Chi Mei Corp has traded through 100bp since launch and is currently hovering around the 120bp mark. They also say there was an asset swap book for about 30% of the deal, with a number of large accounts prepared to buy it outright.
The tight credit spread helped make the bond floor more defensive and acceptable to institutions concerned about the longevity of the tech rally. A total of 55 accounts are said to have participated, with a split, which saw 35% placed in the UK, 35% with offshore US accounts, 15% to Continental Europe and 15% Asia.
When Chi Mei priced its last deal, the stock was still down 2.56% on the year and had vastly underperformed the TWSE. From a year-to-date low of NT$17.81 on May 22, the stock has rocketed 88% and is currently up 33.47% since January 1.
With the stock down slightly in the last couple of days, the previous exchangeable is said to have started showing more bond floor after trading as straight equity. This is said to have made pricing slightly more difficult as the deal was bid at 107% on a conversion premium of 2% and bond floor of 95%.
However, most bankers believe that none of Chi Mei's cannibalise each other. The first was a quasi equity placement, which disappeared as soon as it was launched and never re-surfaced, while the second was an exchangeable, which played heavily on the stronger credit of the parent company.
