Taiwanese integrated semiconductor and packaging company ASE priced a $175 million convertible yesterday (Thursday) via ABN AMRO. The transaction incorporated an unusual structure and marks the first time since China Petrochemical in 1998 that the put option has been pushed out to four years.
Terms comprise a five-year maturity with zero coupon structure and redemption at par. The put option in year four is priced at 116% to yield 3.75% and there is also a call in the same year with a 130% hurdle. The conversion premium came in at 38.15% to a spot close of NT$27.3, or 40% to a five-day average of NT$26.8.
Underlying assumptions comprise a bond floor of 92%, implied volatility of 30% and fair value of 104%. This is based on a credit spread assumption of 225bp over Libor, 3% borrow cost, dividend pass through and 100 day historic volatility of 46%.
Books were open for four hours, reaching an oversubscription rate of roughly three times. About 70 investors are said to have participated, with a geographical allocation of two-thirds Europe and one-third Asia. Bankers say the book was also pretty evenly split between asset swap and outright demand.
Key to the deal was the role played by ABN AMRO itself and its aggressive bid for asset swap. In some ways this mirrors its experience with Hon Hai Precision in late July when the bank is reported to have eaten a large chunk of a $450 million convertible.
The Asian convertible market appears to be moving in an increasingly commoditized direction as deals are won on the basis of balance sheet strength rather than corporate finance relationship. ABN readily acknowledges a willingness to use its own capital to secure aggressive pricing levels for clients and with Hon Hai, the bank is said to have gone on to make a significant amount of money, since the stock consecutively traded limit up in the days following the deal.
With ASE some observers believe the bank bid for up to $150 million in the credit market, although ABN itself says the actual figure is less than $100 million. Certainly ASE has also been able to secure one of the most aggressive conversion premiums on record, a fact made all the more impressive given that the stock is already up 47.21% so far this year.
Its decision to include a four-year put option stems from its desire to re-balance its debt maturity schedule. Bankers also conclude that the option has a lot of value for investors.
Says one, "If you look at the 100 day volatility and implied volatility, there's a lot of value there. The longer dated the option, the more value there is."
