Asustek completes CB

Taiwan motherboard manufacturer secures aggressive terms in a strong market.

Lead manager Merrill Lynch priced an increased $321.6 million convertible for Asustek Computer yesterday (Thursday). Terms were adjusted slightly to extract more value, with the issue price raised from par to 100.50% and proceeds from $280 million to $281.4 million. With the greenshoe expected to be exercised today, proceeds will rise to $321.6 million.

Final terms comprise a five-year maturity with two-year call and put options and redemption at 98.5% to yield minus 1%. The conversion premium was fixed at the top end of the indicative range at 32.50% to the stock's spot close of NT$76.5.

Underlying assumptions comprise a bond floor of 92%, implied volatility of 38% and theoretical value of 96%. This is based on a credit spread of 90bp over Libor, 5% borrow cost, 3.2% dividend yield and 30% historic volatility.

The theoretical value is extremely aggressive although given a ack of borrow, it is difficult to extract value from the option.

"This is the first time I've seen an eight vol premium that hasn't struggled to get out of the door," says one observer. "It's a momentum deal. Historic volatility was 40% to 50% a year ago, but has been flat around the 30% level since last summer. Participants are betting that with an election just around the corner, it will start to rise again."

But in an indication of market strength, books are said to have closed 10 times oversubscribed even after orders were capped at no more than 10%. About 200 investors participated.

Asustek has an implied mid to low triple B rating in line with notebook manufacturer Quanta Computer, which has a June 2008 bond outstanding. This was trading yesterday at a bid price of 110.50% and has also seen implied (37.5%) trade through historic volatility, which has come down from 45% to 35%.

One notable difference between Asustek and the rest of the Taiwan tech sector is that its stock price has been on a declining trend since last July when it hit a high of NT$105.78. The motherboard industry has been badly hit by margin pressure, but a number of analysts believe that this may have bottomed.

At its current share price the company is trading on a 2004 P/E multiple of about 11.5 times.

Over the past few years it has been diversifying away from motherboards, which now account for only 40% of revenue and into notebook computers, which account for 30%. Local media have also reported that Asustek may have entered the top 10 own-brand notebook manufacturers as of end December, supplanting Gateway.