Chunghwa Picture Tubes CB in high demand

Generous terms and the recent investment by Warburg Pincus contribute to the strong interest, which sources say was 15 times greater than the supply.
Taiwanese TFT-LCD panel manufacturer Chunghwa Picture Tubes (CPT) raised at least $125 million from a convertible bond at the end of last week, which received a strong reception from investors.

Looking at the terms that doesnÆt seem too surprising, and CB specialists say the bonds were clearly priced to go with a low conversion premium range of 7% to 13%, a 1.5-year put and four potential resets down to a floor of 80%.

However, sources close to the deal pointed to the fact that the company is still loss-making û it reported a record shortfall of NT$13.9 billion ($430 million) in 2006 - and also in breach of several covenants related to its existing long-term loans. This means it is technically in a default position and needed waivers from its lenders to proceed with the convertible bond issue. They also noted that the companyÆs previous CB in July 2006 required a considerable effort from the bookrunners to get out the door despite a conversion premium of only 7%. And even then, the deal was only just covered, although admittedly it was twice the size of the latest CB at $250 million.

CPTÆs share price also continued to trade sideways for about nine months after the previous bond issue, which obviously didnÆt do much for the investor confidence. The stock reached a low of NT$5.71 in early March this year, which represented a 22.5% decline from the CB reference price.

Over the past five months, the share price has had a healthy run, however, and the previous CB is now in the money. But what really changed the scenario this time around, observers say, was the news two weeks ago that Warburg Pincus has agreed to invest $250 million in the company, as well as an announcement on the day of the CB issue that CPT and LG.Philips have signed a memorandum of understanding to end all their patent disputes, which date back as far as 2002.

In a brief statement issued last Thursday, CPT said the agreement û assuming the MOU leads to a definitive deal - will settle all patent-related litigation between them and the two companies will share past and future patents related to LCD technology. It didnÆt disclose any financial terms, but the share price jumped 6.9% on the day in response to the news. As of last Thursday, the stock had risen a total of 12% since the deal with Warburg Pincus, which will see the private equity firm buy six-year bonds that can be converted into a 10.2% equity stake in the company.

Investors also came into the CB in much greater numbers and with larger order sizes than anticipated and in hindsight joint bookrunners ABN AMRO Rothschild and Barclays Bank probably wished they had been a bit more aggressive on the terms.

The five-year, zero coupon bonds were offered with a conversion premium of 5% to 13% over ThursdayÆs closing price of NT$9.16 (extending last yearÆs premium range of 7% to 12% at both ends) and a yield to put of 4% to 5%. As it were, investors were happy to take on a 13% premium and settled for a yield of 4.5%.

And perhaps even more surprisingly û given how jittery the credit markets are at present - they were also confident enough to buy the bonds virtually without any asset swaps. This is unusual as investors typically want credit protection for 30%-40% of Taiwan CBs, but according to one source, the bookrunners didnÆt need to provide any credit bid at all. Another said there had been a small amount of about $20 million to $25 million available to back up the assumption of a credit spread at 550 basis point over Libor.

Either way, it clearly wasnÆt needed as the deal attracted about 140 accounts and close to $1.9 billion of demand. Given that both the share price and the bonds have traded higher in the three sessions since the CB issue (the Taiwan market was open on Saturday to compensate for the mid-Autumn holidays earlier in the week) it seems highly likely that the $50 million greenshoe option will also be exercised, resulting in a total deal size of $150 million. The share price closed at NT$9.40 yesterday, up 2.6% from the Thursday close, while the CB was bid at 104.5% of face value.

ôThe terms were likely based on a different pre-litigation news scenario, but on the other hand that news was partially reflected in the share price,ö says one observer, noting that if you add the 6.9% rally earlier in the day the conversion premium would look ôalmost normalö.

To be sure, investors are also hoping that the company, which is TaiwanÆs third largest manufacturer of thin film transistor-liquid crystal displays (TFT-LCDs), is about to turn a corner after reporting a net profit of NT$504 million in the second quarter û its first quarterly profit since the fourth quarter 2005. It is, however, still in the red for the first half to the tune of NT$2.57 billion although the loss has narrowed considerably from the NT$7.25 billion it lost in the first half 2006.

CPT chairman Lin Wei-shan has said the company is expecting to turn a profit this year as panel prices are heading higher.

ôWe're seeing increasing interest in the TFT-LCD sector due to the improving industry dynamics. There is (also) particular interest in CPT catalysed by Warburg PincusÆ recently proposed $250 million convertible bond investment and CPT's improving financial performance on the back of the ramp up of their 6G fab,ö said Meighen Robertson, co-head of Asia-Pacific TMT Banking at ABN AMRO.

The conversion premium will be reset at 101% of the average closing price for the previous 20 days if the share price fails to perform and is lower than 99.01% of the initial conversion price after nine months, and again after 18 months, 30 months and 42 months. Investors can put the bonds back to the issuer after 18 months and there is an issuer call, also after 18 months, subject to a 130% hurdle. Should the bonds remain in the market until maturity, they will redeem at a yield of 3.6799%, which is at a lower return than if they are put back after 1.5 years.

Based on the 550bp credit spread, a stock borrow cost of 5% and a full dividend pass-through, the bonds were valued with a bond floor of 92.3% and an implied volatility of 27%. The latter compares to a 100-day volatility of 36.5%.

The deal was launched at 9pm Hong Kong time last Thursday, but because of the updates that needed to be made to the offer document in light of the litigation settlement news û and a requirement that all potential investors need at least an hour to look at that document before committing û it didnÆt close until the early hours of Friday morning.

The longer ôopening hoursö may have helped to attract more European investors to the deal, with sources saying about half the demand came from Europe. About 25%-30% was generated out of Asia, while some US accounts and ôsome other accountsö also participated.

While ABN AMRO Rothschild is a veteran in arranging deals for CPT, this was Barclays first CB in Taiwan and also only its second Asian CB outside of India. In June, it completed its inaugural Korean CB in the form of an upsized Ç160 million deal for Ssangyong Motors. Sources say Barclays was included as a joint bookrunner on the CPT deal after doing a lot of work on obtaining the necessary waivers from the local banks that enabled the company to take on yet more debt.

ABN AMRO Rothschild also acted as joint bookrunner together with JPMorgan on memory chip maker ProMOS TechnologiesÆ $300 million convertible in February this year, which is the only other publicly marketed CB for a Taiwanese company this year.

In May, Deutsche Bank also completed a $300 million pre-IPO CB for Taiwan High Speed Rail, which was preceded by a three-day roadshow and partially sold into the public market.
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