Apple supplier Zhen Ding taps CB market for $300m

Taiwanese circuit-board maker takes advantage of strong convertible market to sell three-year zero-coupon deal.

Zhen Ding Technology, a Taiwanese company that supplies flexible circuits to Apple, raised $300 million on Wednesday night through a three-year zero-coupon convertible bond.

The pricing of the deal gave a good indication of how conditions have improved for CB issuers recently. Offering a yield of just 0.125% and a conversion premium of 15%, Zhen Ding achieved considerably better terms than it secured on its debut CB in May 2012, when it priced at a yield of 1.5% and a conversion premium of 10.4%.

Both deals have a similar structure: a five-year maturity with a three-year investor put. There is also an issuer call after three years, subject to a hurdle of 125% (compared to a one-and-a-half-year call on the first deal).

Zhen Ding is a subsidiary of Hon Hai Precision Industry and was spun off for a separate listing on the Taiwan Stock Exchange in December 2011. It makes flexible circuits that allow consumer electronic product designers to save space — a crucial component in gadgets such as iPads and iPhones.

Indeed, the company is often described by investors as an Apple concept stock and its share price moves in relatively close correlation with that of its biggest customer. That relationship is set to become even closer, as Apple is expected to increase the size of its orders during the second half of the year when it launches several new products.

This has led analysts to increase their one-year price target for the stock to a consensus of NT$100.6, according to Bloomberg data. At that level, the consensus price target is around 5.5% above the current market price.

The existing CB will convert if the stock reaches NT$99 by June 2015.

Although Zhen Ding priced at more favourable terms than its previous deal, investors were still attracted to the relatively low premium this time — especially compared to recent deals such as the exchangeable into Beijing Enterprises, which priced last week with a 43% premium, in a $553 million deal jointly led by Citi, Credit Suisse, Deutsche Bank, HSBC and UBS.

Zhen Ding’s global coordinators, Bank of America Merrill Lynch and Citi, marketed the deal with a premium range of 12.5% to 17.5%, based on the Wednesday closing price of NT$93.9, which gave a conversion range of NT$105.64 to NT$110.33. The yield on the zero-coupon bond was marketed at a range of 0% to 0.25%.

A banking source said that the deal was half-covered before launch thanks to the support of a group of cornerstone investors that had been invited to look at the deal before it launched. That allowed the company to move fairly quickly after the market closed and to price the deal at the midpoint by 10pm on Wednesday evening, resulting in the 15% premium and 0.125% yield to maturity.

The deal attracted 65 accounts, with 60% of the allocation going to long-only investors and 40% to hedge funds.

As with most Taiwan deals, the availability of asset swaps gave hedge fund investors the ability to strip out the credit risk and helped the bookrunners to sell the deal. Zhen Ding’s credit was priced at 235bp.

Stock borrow was limited, however, meaning that investors assumed a 5% cost to hedge the equity portion.

With a historic volatility of 30% and an assumption that the share price would not fall on Thursday morning, the bond floor was calculated at 90.7 with an implied volatility of 25.1% and fair value of 102.8.

The bond portion was said to be trading slightly up on Thursday, according to the banker, while the stock was up 1.7% at lunchtime.

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