CMC Magnetics completes CB

At pricing in London yesterday (Wednesday), CMC Magnetics raised $100 million from a zero coupon convertible that offers investors the most attractive terms for a Taiwanese convertible year-to-date.

Led by Lehman Brothers, a five-year deal was priced at par with a conversion premium of 11% to Wednesday's NT$26.4 close and a re-set in years two, three and four subject to a cumulative floor of 80%. The deal is non-callable for three years and thereafter subject to a 125% hurdle.

It also has put options in years two and three, with redemption at par. In year two, the bond is puttable at 113.758% to yield 260bp over Treasuries, or a yield-to-put (YTP) of 6.55% and in year three, at 122.357%, equating to a YTP of 6.84% and Treasury spread of 260bp. This represents the outer end of indicative terms, comprising a conversion premium of 11% to 14% and put options at 108% to 114% and 112% to 122%.

Underlying terms comprise a bond floor of roughly 95.6% to 96.1%, theoretical value of 115% to 117% and a credit spread of 400bp over Libor. Implied volatility stood at 11% to 13%, versus historical volatility of 40%.

Alongside the lead, Chinatrust acted as co-lead, with Citicorp, Deutsche, Grand Cathay and Nomura as co-managers. Syndicate members report that the deal was a tough slog and had to battle hard against pre-summer indifference on top of Taiwanese convertibles fatigue.

Market conditions were also extremely trying with the Taipei Weighted Index hitting eight year lows on both Monday and Tuesday. However, some bankers now believe that bad second quarter earnings news is written into the market, with the result that a number of investors are looking at bottom fishing.

"CMC Magnetics is now trading at its lowest level since January and a number of equity investors who participated in the transaction believe the sector has seen its worst," one banker says. "Because the Taiwanese market has dropped so sharply during the second quarter, none of the deals from earlier in the year have any equity optionality left. This deal, therefore, has inherent appeal."

Much of the book is believed to have been asset swapped, however, with local bankers seeing credit lines freed up after a previous convertible was put back to the company in June.

"This deal was a gift to hedge funds," a second banker reports. "It has a very high bond floor and as a delta hedger, the option was very cheap. Because the protection was so high, investors would have felt reasonably comfortable taking a naked position."

With annual re-sets, the effective conversion premium came in the single digits and the YTP also easily broke the 6% barrier, offering upside against an existing deal for CMC due 2004 and a recent convertible by rival CDR manufacturer Ritek. The latter has a 2006 issue with a zero coupon issue trading on a YTP of 6.138%, with a two year put priced in April at 112.05% and in year three put at 118.61%. Led by Salomon Smith Barney and JP Morgan, it is currently bid just above issue price at 100%/100.25%.

CMC itself has a deal puttable in October 2002 that is said to be trading on an asset swap level of about 310bp over Libor, although it is also said to be highly illiquid.

Similar to Yageo before it just over a week ago, CMC’s rationale for coming to the market now largely stems from a desire to achieve certainty of funding ahead of the autumn rush.

Year-to-date, the stock has still outperformed the underlying market and is up 38.08%. Over the past week, however, it has come down heavily and had been up 60% on the year only last Tuesday.

Its convertible brings Asia’s tally of equity-linked deals so far this year up to 20. According to figures prepared by Salomon Smith Barney, the best performing have been convertibles by India’s Gujarat Ambuja Cements, which is up roughly 4% and Taiwan’s Quanta Computer, up about 3.5%.