CDFHC prices CB

Taiwanese pipeline continues to unfold.

For the third day running, a convertible deal has emerged from Taiwan, with China Development Financial Holding Company (CDFHC) raising $310 million from a short-dated deal. For lead manager JPMorgan, the transaction was particularly noteworthy, since it propels it to the top of the Asia ex-Japan equity-linked league tables for the first time following its merger with Chase and Jardine Fleming.

Because of the heavy pipeline of issuance from Taiwan, the deal took eight days to achieve final regulatory approval and only just slipped in before public holidays celebrating the mid-autumn festival. The structure was designed to allow the group to divest its Treasury shares and has a 16.5-month maturity.

This is because financial holding companies have to divest all the Treasury shares created from the unwinding of cross-ownership structures pre-dating the establishment of financial holding companies. It is also the case that dividends cannot be paid into them.

Terms comprise an issue price of 100.619% and redemption at par to give a negative yield-to-maturity of 0.45%. There is no put option and a call option after one year subject to a 125% hurdle. Co-manager is DBS.

The conversion premium was set at 35% to the stock's NT$12.05 close. Observers say the high premium reflects management's bullish expectations for the stock, but two additional re-sets have also been included as an insurance policy to make sure the deal does get converted.

The first falls after one-year and is subject to an 80% floor and the second within 45 days prior to maturity. Subject to the issuer's discretion, the deal can be called at the conversion price if the stock trades below the conversion price for 10, 15 or 20 consecutive trading days and provided the market value of the shares is no more than 110% of the principal amount.

Underlying assumptions comprise a bond floor of 96.1%, implied volatility of 28.5% and theoretical value of 102.6%. This is based on a credit spread of 90bp over Libor, 500bp borrow cost, full dividend pass through and 38% volatility assumption.

With a BBB+ rating from Standard & Poor's, CDFHC is the highest rated credit in the Taiwanese CB universe and has always attracted high credit demand. Observers say the current deal did not break the norm and about 30% was allocated to asset swap.

However, the group has recently had its outlook revised from stable to negative. In its rating assessment, S&P said this was partially due to an increase in provisioning accounting for 12% of CDFHC's capital, which would nevertheless remain strong.

It also attributed it to the, "difficulties CDIB, the core member of CDFHC, has had in finding new investments to replicate those it made in electronic companies in the late 1980's and 1990's."

CDFHC is Taiwan's largest venture capital investor and has a high 70% correlation to the TWSE because it has seeded and still owns stakes in many of the large tech stocks. Having acquired Grand Cathay Securities, it also now trying to make a greater push into the brokerage business.

Bankers say the deal was propelled by the money flowing back into Asia and appealed to investors that wanted a hedge against any flagging in the tech sector. Books closed 1.5 times covered, with participation by 50 accounts.

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