A $160 million debut GDR and $145 million convertible for CMC Magnetics were completed in quick succession on Tuesday by their respective lead managers JPMorgan and Lehman Brothers. After a few weeks of large equity-linked deals with low volatility from the Taiwanese banking sector, investors appeared to readily welcome a tech name with high volatility.
The GDR and convertible successfully fed off each other, with the convertible in particular able to take advantage of the potential availability of stock borrow to achieve more aggressive terms for CMC than has been the case in the past.
Pricing of the GDR came first, with terms fixed at $14.09, equating to a 6.67% discount to a spot close of NT$25.50. This not only represents the tight end of the indicative range, but also marks the tightest discount of the year from the GDR sector. A total 10 million new share GDR units were sold on a ratio of 20 shares per GDR. There is also a greenshoe of secondary shares comprising 1.5 million units.
The book is said to have closed just over three times covered, with an even geographical split between the three regions. A total of 60 accounts participated.
Where the convertible is concerned, the zero coupon deal had a par in par out structure, with a five-year maturity and two-year put and calls. The put option was priced to 102.8295% to give a yield of 1.4% and the call option was set with a 125% hurdle.
The conversion premium came at the aggressive end of the range and was fixed at 27% to the GDR and 18.51% to the spot close. There is also a $23 million greenshoe and an annual re-set option with an 80% floor.
Underlying assumptions comprise a bond floor of 92.9%, theoretical value of 103.5% and implied volatility of 22.9%. This is based on a credit spread of 325bp over Libor, zero dividend, zero stock borrow and 30% volatility assumption.
The two most striking aspects relative to CMC's last convertible in March are the low bond floor and two-year put option. The former reflects the prospect of stock borrow and the latter stems from the company's desire to extend its maturity profile as it continues its overall debt reduction efforts.
Terms for the $120 million zero coupon in March included an 11% conversion premium and put options in years one and two. The first put option was priced at 100.5% and the second at 101.004% to give a launch yield of 0.5%. This equated to a bond floor of 95.6%, implied volatility of 20% and a credit spread of 350bp.
The deal is currently trading on a high cash price of 136% and thanks to an 82.80% rise in the stock price year-to-date, is trading in-the-money. As a result it is said to have seen heavy conversion, with only 30% of the original deal outstanding. Likewise, both of CMC's convertibles from 2001 and 2002 are in-the-money and each have roughly 50% left outstanding.
Extensive conversion means that credit lines have re-opened, but CMC's leveraged balance sheet does not lend itself to heavy asset swap demand. Only about 10% of the new deal was felt to have been swapped.
Observers report a total of 185 accounts in a book, which closed with demand of $2.2 billion. A 15 times oversubscription rate was achieved after just three hours of launch on Monday, with final pricing held over until the GDR was completed on Tuesday. By geography, 56% of the deal went to Europe, 28% to Asia and 16% to the US.
Proceeds from the two deals are partially being used for capex and partially to pay-down debt. CMC has previously said that it hopes to bring debt-to-capitalization down from 40% to 31% over the course of the 2003 calendar year and report positive free cash flow. So far, it has so far divested NT$1 billion from its non-core investment portfolio.
The company also hopes to expand its CD-R (compact disc recordable) facilities in China and its DVR-R/W (digital versatile discs- recordable) facilities in Taiwan. It has outlaid $199 million in capex for 2003 and $201 million for 2004.
