A $100 million zero coupon issue was priced Wednesday night after books closed two times oversubscribed. The deal was launched and priced within a 24 hour marketing period, although the lead had previously undertaken extensive credit marketing.
Similar to July 2001, when CMC last launched a $100 million zero coupon issue, convertible experts say the lead had a difficult execution job on its hands because there is not that much of a credit bid for the company.
"CMC's experience mirrors that of Ritek Corp, which launched a deal that struggled at the beginning of January," one convertible specialist comments. "Both companies occupy the same industry sector. Both had outstanding deals, which had already eaten up credit lines and both were tough to market to investors."
Where CMC is now said to hold an advantage, however, is in investors' perceptions of its equity and credit strengths relative to Ritek. Domestic analysts and Asian convertible bankers tend to agree that the positions have flipped since last summer, with CMC now the favoured company of the two. In terms of credit, CMC has a one notch higher domestic credit rating of BBB+ to Ritek's BBB and in terms of equity, analysts say they have been impressed by the way CMC has been able to make inroads into Ritek's market share.
Pricing of the deal sees a five-year transaction with two-year call and put options. The call option has a 125% hurdle and the put option was priced at 110.022% to yield 4.833% or 180bp over Treasuries. There is also a downward re-set after the first year subject to an 85% floor and the conversion premium was fixed at 11% to Wednesday's closing share price. The stock closed Thursday at NT$25.2, down 3.08% on the year.
Alongside Lehman, Citibank Taipei was joint lead, with Chinatrust as co-lead and Grand Cathay as co-manager. Distribution was said to have split 50% Europe, 25% Asia, 25% US.
Underlying assumptions comprise a bond floor of 94% to 94.5%, with theoretical value of 109% to 110% and implied volatility around the low 20% level. This is based on a credit spread of 400bp to 425bp over Libor, zero stock borrow and zero dividend yield.
Within a day of launch, the deal was trading just above par. CMC's outstanding 2006 transaction was one of the better forming convertibles of 2001 and is still trading about five points above its bond floor at 108%/109% on a conversion premium of 28.1% and yield of 2.733%.
Terms this time round also compare favourably to July 2001, when the company achieved the same conversion premium, but had to pay a higher two-year put price of 113.758%, higher yield-to-put of 6.84%, higher bond floor of 95.6%, higher theoretical value of 115% to 117% and cheaper implied volatility of 11% to 13%.
