Chunghwa Picture Tubes clinches $250 million from CB

Scarcity value and low premium help to carry the deal, while a leading industry player suggests troubles in the sector aren't over yet.
Taiwanese TFT-LCD panel manufacturer Chunghwa Picture Tubes has taken advantage of what is perceived to be a final two-week gap before investors head on holidays to raise $250 million from a convertible bond.

The bonds, which have been lurking in the pipeline for about six months, attracted a bit of interest due to a dearth of CB issuance out of Taiwan this year and some investors were likely convinced by a low conversion premium. However, the total demand was said to have been a bit thin to cover both the base size of $250 million and the $50 million greenshoe, which prompted a decision by sole bookrunner ABN AMRO Rothschild not the allocate the latter.

About 47 accounts were said to have bought into the offering û which was the largest of three CBs from Taiwan this year - but according to sources many investors came into the deal with orders that were one third or half the size of what can normally be expected on a deal this size.

ôThe terms looked reasonably attractive, but sentiment is still not great and this is not a Tier 1 company that everybody wants to own,ö says one observer.

Chunghwa Picture Tubes and other second tier LCD panel manufactuers have been suffering due to a gradual decline in product prices and have come under additional strain since the world's third-biggest LCD maker, AU Optronics Corp, announced plans to merge with smaller player Quanta Display in early April.

The CB traded down in the secondary market yesterday (July 11) as CPTÆs share price underperformed the wider market with a 2.8% drop. The LCD sector as a whole was weak, however, after LG.Philips LCD reported a record quarterly loss for the second quarter after failing to benefit from the just-ended football World Cup and said it expects flat screen selling prices to decline further.

CPT reported a narrowing net loss of NT$1.47 billion ($45.4 million) in the first quarter.

Market participants said the CBs were trading as low as 98.5% intraday after being sold at par. The deal was launched at about 7.30pm Monday and completed in the early hours of Tuesday (July 11) morning.

The zero-coupon bonds have a five-year maturity, but can be put back to the issuer after 1.5 years for a yield of 2.75%. They were marketed to investors with a yield ranging from 2.25% to 2.75%.

The conversion premium, which was offered at 7% to 12% over MondayÆs closing price of NT$7.37, was also fixed at the generous end. The 7% premium gave a conversion price of NT$7.89.

With a bond floor of 90.2% for what is essentially a 1.5-year maturity, the equity option still looked pricey, according to one CB specialist, although this was somewhat offset by the low premium, he said. In addition, the implied volatility was 21.4%, compared with a 100-day historic volatility of just over 30%, which together with the premium and the 2.75% yield made it ôcheapö in the eyes of another observer.

The premium was likely to have been pushed down by the fact that the share price hasnÆt performed that well over the past six to 12 months, when it has fallen by 29% and 35% respectively. Meanwhile, the companyÆs need for money to finance ongoing expansion of its product facilities was believed to have driven the issuer to accept slightly more generous terms to get the deal done in a market which is still feeling the effects from the selldown of global equities in May and June.

On Monday, CPT announced that its consolidated net sales fell 8.3% in June from a month earlier to NT$8.53 billion, but was up 0.9% year-on-year. Sales in the TFT business unit dropped by 11.3% from May, although June shipments of large-size panels for desktop monitors, notebooks and LCD TVs jumped 37.9% from a year earlier to 1.8 million units.

The CB pricing was based on a credit spread of 425 basis points above US Libor. Both the bookrunner and external parties provided asset swaps at that level for about 40% of the deal, although only about two thirds of that was said to have been taken up.

Other assumptions included a full dividend protection, although at present the company doesnÆt pay dividends, and a stock borrow cost of 5% as no lending is available.

Half the deal was bought by European investors, which was not surprising given the late opening of the books. Asia took about 35%, while the remaining 15% ended up with off-shore US accounts. In terms of types of investors, CB specialist funds and hedge funds was said to have accounted for two thirds of the demand while the rest came from off-shore Taiwanese investors.
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