Acer launches $500 million convertible bond

The deal comes with two tranches and is priced with a zero coupon, making it the first large zero-coupon CB in the world in two years.

Acer Inc, the world’s second-largest computer maker, launched a $500 million two-tranche convertible bond last week which priced with a zero coupon and was re-offered at par. This is the first large zero-coupon CB in the world since 2008, indicating the issuer’s confidence in its profit growth and equity performance in the coming years.

Some analysts expect the CB market to be active between now and the end of 2011 as many Asian corporations with strong company fundamentals move to refinance their balance sheets. And, when there are still uncertainties in the market, CBs are a good alternative because the yield component provides a cushion against a drop in the underlying equities.

But others believe direct CB investment is likely to remain a market for professionals, given the level of expertise required. A CB is a bond that can be converted into a pre-determined amount of a company's equity at certain times during its life through a stock option embedded in the contract.

The first tranche of Acer's CB is a $300 million five-year convertible note with a put option for investors to sell the bonds back to the company after three years. The other is a $200 million seven-year CB with a put option that will become exercisable by investors in five years.

The shorter-dated tranche was marketed with a conversion premium range of 25% to 35%, while the longer one was between 27.5% and 40%. The final prices were fixed at premiums of 30% and 33.75%, respectively, to the last closing price of NT$85.2 ($2.67) on August 5 on the Taiwan Stock Exchange, according to bankers involved in the deal.

The premium will allow investors to convert the bonds to equities at NT$110.76 and NT$113.95 per share, respectively. Bondholders can convert at any time on or after 41 days after closing on August 10 until 10 days prior to maturity. Yield to maturity of the two tranches were 0.43% and 2.5%, respectively.

Bondholders of the first portion have the option to return the bonds back to the company at NT$86.3, or 101.297% to the NT$85.2. While the other portion comes with a put price of NT$96.47, representing 113.227% to the reference price. The CB is non-callable for the issuer in the first three years.

Despite the zero-coupon offering, the transaction received strong investor demand with high quality orders generated during the two-hour bookbuild on Thursday night. Investors included hedge funds, CB investors, private banks and equity funds, sources said.

“All issuers ideally want to have zero coupons if they can get them. With normal coupons, issuers need to pay the coupon interest rate costs to investors every six months,” a banker said. “The market used to see a lot of zero coupon deals in 2006 and 2007, but they have been gone completely since 2008.”

The transaction was denominated in US dollars with a fixed exchange rate of NT$31.83 to every US dollar, according to the term sheet.

J.P. Morgan and Citi arranged the deal.

Acer will use the proceeds to fund the operation of its newly founded joint venture with China’s Founder Technology Group. Under Acer’s agreement with the Shanghai-based PC maker, Acer will operate Founder’s planning, marketing and supply chain management, and Founder will operate Acer’s after-sales service, it said in a statement last week. The companies will jointly develop products aimed at the China market, it said.

¬ Haymarket Media Limited. All rights reserved.