Singapore's Chartered Semiconductor secured an unexpectedly strong showing for its debut international bond on Friday (July 29). Under the lead of Citigroup and Goldman Sachs, the Baa3/BBB- rated group decided to increase its SEC registered deal from $450 million to $625 million on the back of a $4.5 billion order book.
A five-year tranche was sized at $375 million and priced at 190bp over Treasuries to yield 6.009% based on a re-offer price of 98.896% and coupon of 5.75%. This equates to a Libor spread of 146bp.
A 10-year tranche was sized at $250 million and priced at 230bp over Treasuries to yield 6.572% based on a re-offer price of 98.573%. and coupon of 6.375%. This equates to a Libor spread of 186bp.
Co-leads were ABN AMRO and Bank of America.
Combined the two tranches attracted 170 investors, with total demand of $2.8 billion for the five-year tranche and $1.7 billion for the 10-year tranche.
By geography, the five-year tranche saw 66% placed into the US, 23% into Asia and 11% into Europe. By investor type, 62% was allocated to asset managers, 14% to banks, 13% to insurance companies and 11% to private banks.
The 10-year tranche saw 82% placed in the US, with 10% to Asia and 8% to Europe. Asset managers took 67%, insurance companies 14%, banks 12% and private banks 7%.
The distribution statistics reveal a very strong tilt towards the US where investors have much greater experience with credit from the tech sector. Very little paper was placed in Singapore where banks are said have full lines for both Chartered and its parent Temasek.
Typically US investors will demand a fairly high premium for Asian deals relative to domestic comparables. But in this instance they seem to have been swayed by Temasek's halo effect and strong market momentum. The triple-A rated arm of the Singapore government ultimately owns 60% of Chartered.
The importance of its ownership was reflected in a change of control put embedded in the deal. Investors have the right to put the bonds at 101% if any one of three events takes place.
The put will be triggered if: Temasek's ownership falls below 30%, if it ceases to be the single largest shareholder in the company and if it ceases to control it.
Specialists say many accounts viewed the deal as a leveraged play on Temasek. Relative to US tech companies, the deal was also felt to have value.
Long-dated bonds from the tech sector are relatively rare, but there are some comps. The closest in terms of rating is Freescale Semiconductor.
The group has a one notch lower rating than Chartered and falls into non-investment grade territory. It also has a 2014 bond, which is currently trading at 183bp over Treasuries. Chartered has, therefore, paid a 47bp premium for a deal that is one-year longer, but higher rated.
In Asia investors are said to have benchmarked the deal against BBB- rated credits such as Road King and China Overseas. The former has a six-year deal currently quoted at 128bp over Libor and the latter a seven-year deal at 122bp over.
As one observer comments, "Investors looked at triple-B rated comps and then demanded a slight premium to take account the volatility of the tech sector."
Chartered itself raised five-year loan funding towards the end of 2004 at 170bp over Libor.
Key for Chartered now will be how well it benefits from a cyclical upswing in the semiconductor industry. Analysts now agree the sector has turned, but a number remain skeptical whether Chartered will be able to sustain the momentum for long given its history of losses.
However, the most bullish believe the group is poised to take the mantle from UMC as the world's second largest semiconductor manufacturer. This optimism is based on Chartered's heavy R&D spend over the past few years, which may now start to bear fruit.
If Chartered can catch up with UMC, it may secure its rival's BBB+ rating, or even pierce it thanks to Temasek's ownership. Over the short-term however, some may query why Chartered is loading up with more debt when it has said it is in debt reduction mode.
In tandem with the bond deal, Chartered has raised $250 million from a convertible redeemable preference share issue. This issue was structured such that Chartered could avoid putting more debt on its balance sheet.
Together, proceeds from the bond and convertible will be used to fund a tender offering for the group's outstanding $575 million convertible due April 2006. The group needs about $664 million to take out the CB and will use the remaining proceeds to fund capex.
As a result of the new deal, net gearing will hit the 70% mark.