Nasdaq-listed ChipMOS Technologies entered the convertible bond market after New York's close on Wednesday with an increased $75 million deal led by Lehman Brothers. The company timed the deal to try and gain a pricing advantage ahead of a pack of prospective Taiwan tech deals from among others: Hannstar, CMC Technologies, QDI and Nan Ya.
Market conditions permitting, all four are expected to launch equity-linked deals over the next couple of weeks following the announcement of third quarter results. ChipMos jumped to the head of queue by pre-announcing its results and filing a Reg S offering, which would allow it to complete a deal over an accelerated one-day marketing period.
Its desire to access the equity-linked market has been driven by the funding requirements of a new plant in Shanghai. Earlier this summer, it hoped to secure $100 million through an IPO, but ended up raising only $40 million after hitting the market during one of the low points of the tech cycle.
Prior to this, it originally tried to complete an IPO in 2001, but ran up against similarly bad market sentiment and finished up with a listing without offering any shares. Finally this July, it issued seven million shares at $5.50 each and has since seen the stock price run up 75% to $9.50 before news of the CB pushed it down 15% during Wednesday's trading in New York.
Downward pressure can partly be attributed to the dilutive effect of the CB, which represents 14% of the company and will expand the freefloat by 25%. The CB would have also come as something as a shock to investors since the IPO lock-up does not expire until mid January.
However, IPO lead manager, Lehman, gave its permission to lift the lock-up and went out with a $50 million CB plus a $12.5 million greenshoe. This was increased to $75 million plus a $10 million greenshoe after books closed roughly three times covered.
The deal was priced at the tight end of its indicative range and unusually for a Taiwanese CB carries a coupon - because the company is incorporated in Bermuda it is not subject to Taiwanese witholding tax regulations.
Terms comprise an issue and redemption price of par with a coupon of 1.75% compared to a range of 1.75% to 2.25%. There is also a call option after two years subject to a 130% hurdle and a put option at par after two years.
The conversion price was fixed at a 15% premium to the stock's close of $6.83 on Wednesday and there is also an annual re-set with an 80% floor. The re-set is more valuable than most Taiwanese deals since it re-sets to an average price rather than the standard average price plus the conversion premium.
Underlying assumptions comprise a bond floor of 89.5%, implied volatility of 22% and theoretical value of 106%. This is based on a credit spread assumption of 450bp over Libor, 5% borrow cost, zero dividend and 35% volatility assumption.
Terms for the deal look cheap relative to most Taiwan CB's but the deal has a wider credit spread assumption than most and unlike its locally-listed comparables, there is no asset swap. Bankers say some accounts may have been able to get hold of stock borrow, which makes the volatility play a lot more attractive.
The deal had very targeted distribution with participation by only 12 accounts, of which three already own the stock.
Thanks to the stock's fall on Wednesday it is now trading back at a discount to sector comparables such as Siliconware Precision Industries and ASE Test.
The former has a market cap of $1.5 billion and is currently trading on a 2005 P/E of 10.5 times and price to book ratio of 1.6 times. The latter has a market cap of $595 million and is trading on a 2005 P/E ratio of 8.2 times and price to book ratio of one times.
At Wednesday's close, ChipMOS was trading at 7.31 times 2005 earnings and on a price to book valuation of 1.87 times. It has a market cap of $565 million and analysts forecast 2004 revenue of $465 million. The company's major shareholder is Mosel Vitelic, which indirectly owns 43.7%.