Casio Computer issues Ñ50 billion convertible

The Japanese blue-chip sets the conversion price at a 35% premium, attracting strong interest from investors.
On Tuesday evening, and after a rapid bookbuild of less than three hours, Casio Computer sold Ñ50 billion ($476 million) worth of convertible bonds in a Reg-S deal to European, offshore US and Asia-Pacific accounts. The proceeds are to be used to expand the company's highly profitable business abroad, which includes the famous G-Shock watch.

The deal had two joint bookrunners, JPMorgan and UBS, with Daiwa Securities SMBC Securities as co-manager.

The conversion price was set at Ñ1,952, a 35% premium to the dayÆs closing price, after being offered in a range of 25% to 35%. The deal reportedly went very smoothly. öItÆs the only convertible bond by Casio out in the market, so it has rarity value. And from the issuerÆs point of view, it gives them access to a whole new body of investors, who would not buy the company's debt or common equity,ö notes one specialist.

Some long funds, as well as hedge funds, were among the buyers. The number of investors receiving bonds was reportedly in the double digits.

The zero coupon, zero yield bonds have a maturity date of March 31, 2015. There is a 100% cash put option, effective on March 30, 2012. There is also a soft call option, beginning on March 31, 2010, subject to a 130% trigger. The credit default swap (CDS)assumption was reportedly 35-40 basis points.

The bond floor is 95%. Implied volatility is 33%, versus a historic volatility of 50%, which is reportedly standard for a technology stock.

ôThe issue was very price-insensitive. There was overwhelming demand at (a premium of) 25%, making it logical to price at the top of the range,ö according to a banker.

On Wednesday, the CB traded up, but the stock opened 6.6% lower. However, given the roughly 10% dilution that will occur if the bonds are converted into stock, a drop in the current share price was mathematically inevitable, point out specialists. The stock closed on Wednesday at Ñ1,360, down 5.9% from a close of Ñ1,446 on Tuesday.

There is no conversion price reset clause, or any credit bid. The latter do occur in Japan but the issuer is such a well known blue-chip that bankers saw little need for the additional comfort.

The bondholders will benefit from dividend yield protection, with the dividend payout capped at Ñ33 per share initially, subject to 20% annual thresholds, from March 2009 onwards.

The deal was boosted by some "buy" reports, notably one by Nomura, just before it priced.

Some questions were raised about the size of the premium, which might look aggressive for a well-established blue-chip. But in any case the issuer is protected if it doesnÆt reach that target. ôItÆs zero cost funding for the issuer, since itÆs a zero coupon bond,ö says a specialist, ôso thatÆs cheaper than a straight bond, even at current low interest rates.ö

The cost of the stock borrow is around 40bp as there is no problem to access stock borrow in Japan in order to hedge the issue.

Convertible bonds are likely to continue to be a feature of the markets this year, say bankers in Tokyo, given the prevailing low stock prices. CasioÆs stock price high came in June last year, when it hit Ñ2,040. The stock hit a low of Ñ1,052 in January this year. The Nikkei 225 is gradually recovering from its terrible performance last year, and WednesdayÆs close of 14,579 points is not far off the 2008 high of 14,691 points from January 4.

The 2.5% fees (standard for CBs in Japan) were reportedly split 70/30 in favour of UBS, although all decisions were taken jointly. UBS was sole bookrunner on a Ñ20 billion convertible bond deal by the issuer just under five years ago, with Nomura and Daiwa SMBC as co-managers, so JPMorgan will surely be pleased to get on the deal.

Some Ñ358 billion of convertible bonds have been issued in Japan so far this year, from nine issuers. Nomura has a market share of more than 50%, followed by Deutsche Bank, Daiwa Securities SMBC, JPMorgan and UBS.
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