AU Optronics upsizes five-year CB to $800 million

The deal comes with a zero coupon, but offers a yield of 2.875%, resulting in strong demand from both outright investors and hedge funds.

AU Optronics Corp, Taiwan’s leading manufacturer of TFT-LCD panels, last night sold $800 million of five-year convertible bonds that was well-received by the market. According to sources, the deal attracted $2.5 billion of demand and more than 150 investors, which allowed it to be upsized from a base size of $600 million.

The bonds are convertible either into AUO’s common shares listed in Taiwan, or its American depositary shares which trade on the New York Stock Exchange. They came with a zero coupon, but were priced with a yield-to-maturity of 2.875% and a conversion premium of 27.5% over yesterday’s closing price.

The strong reception would have come as a relief to the CB industry as a whole. There are still question marks surrounding last week’s tightly-priced $1 billion CB from Hon Hai Precision, with regard to whether it was distributed in full and the level of asset swaps that was actually available. There were fears that this might have a negative impact on other deals in the pipeline.

The Hon Hai CB has traded up slightly since pricing, however, and as of yesterday was quoted around 101. While the gain is partly due to an increase in the share price, it does suggest that the concerns about the deal may have been unfounded.

Either way though, looking at the term sheet, it seemed clear that AUO was intent on avoiding these issues and wanted to deliver a deal that felt successful from the outset. For one, the back-ended yield was fairly sizeable and the conversion premium was also quite a bit lower than Hon Hai’s, even though AUO was offering a five-year maturity with no put, versus Hon Hai’s three-year deal.

For sure, AUO is not as strong a credit as Hon Hai and therefore likely needed to offer some yield, but the difference versus the latter’s zero percent yield was still notable and resulted in a deal that was more appealing to outright investors.

The fact that the issuer didn’t put the deal up for competitive bidding, but rather awarded the bookrunner mandates based on its various banking relationships, also meant that it avoided a situation where banks promise terms that may be difficult to deliver when the market environment changes or that end up pushing investors to their absolute limit. The deal was arranged by Goldman Sachs, UBS, Bank of America Merrill Lynch, Citi and Standard Chartered.

At the same time though, the deal wasn’t a give-away. AUO was able to secure five-year financing in size, which was one of its key objectives. According to one source, this was the largest CB out of Taiwan with an effective five-year maturity. Computer maker Acer sold $200 million worth of CBs with an effective five-year maturity in August as part of a $500 million dual-tranche CB issue. The tranche in question had a seven-year maturity and a five-year put, while the second tranche was structured as a five-put three.

Also, the AUO deal came with no asset swaps in the primary, which suggested that investors were happy to take a view on the credit. However, Taiwanese banks are generally happy to provide credit bids and the banks involved in the deal told investors that they are likely to be able to asset swap the bonds in the market at 275bp over Libor.

Mitigating the lack of asset swaps in the primary, there is plenty of stock borrow available, which would have helped attract hedge funds to the transaction. According to a source, hedge funds bought between half and two-thirds of the deal, while the remainder went to outright investors. The buyers were said to have included Asian and European investors, as well as offshore Taiwan and US accounts. The CB was sold under the Reg-S format, and hence wasn’t open to onshore US investors.

AUO offered the CBs with a fixed zero coupon and a yield to maturity between 2.125% and 2.875%, as well as a conversion premium of 22.5% to 32.5% over yesterday’s closing price of NT$31.95. The premium was fixed at 27.5%, which allowed the company to achieve a conversion premium above NT$40 per share -- NT$40.74 to be specific, which is equal to $13.24 per ADS. This is something that AUO had been quite keen on and which to some extent dictated the timing of the deal. A source said the company had held off on the launch until its current share price was high enough to push the conversion price above this level without being too aggressive on the premium.

AUO’s share price was slightly higher last week when it closed at a four-month high of NT$32.80, but even if it has dipped slightly since then, it has been on an upward trend since late August, rising about 18%.

The yield to maturity was kept at best-terms for investors, or 2.875%. The bonds come with an issuer call after three years, subject to a hurdle of 130%.

As mentioned, the bonds were marketed at a credit spread of 275bp and the stock borrow cost was estimated at 250bp, based on a cost of 200bp or so in Taiwan and 50bp or slightly more in the US. There is also a full dividend pass-through for CB holders.

These assumptions resulted in a bond floor of 93.5%, or just over one point per year over the five-year life of the CB, and an implied volatility of 23% after a 3% stock slippage. The ADSs dropped more than that overnight and finished the US session 5% lower at $9.90, but the key test will be today’s trading in its Taiwan-listed shares, which are significantly more liquid. The CB offer closed at 9pm, before the ADSs started trading, to avoid having to market the deal against a live share price.

According the sources, the bonds were bid slightly above par in the gray market during marketing, although there wasn’t much activity.

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