Compal beats the August blues

Compal Electronics proves that August is not a desert for deals, with a $300 million CB.

Compal Electronics, through its bookrunner ABN AMRO Rothschild, priced a $300 million convertible after Asian market closed on Friday. The deal generated more than $1 billion in demand, which allowed it to be upsized from an initial $220 million size. The terms of the deal are in line with the recent spate of Taiwanese CBs that have come out since the end of May. With a five year maturity and a zero percent coupon and zero percent yield, the deal has a put at year two.

The bonds carry a conversion premium of NT$38.40 per share, equivalent to a 10.7% premium over NT$34.70, the closing price of the shares on Friday on the Taiwan Stock Exchange. This conversion price is also 15% above the five day average, which is the premium the company used in its filing with the Taiwanese authorities. Most recently Quanta Computer offered a 14.75% premium with a similar zero coupon, zero yield to put structure although it had a put at 20 months, rather than 24 months. The final allocations on the Compal deal saw the issue go to 96 accounts, of which 40% were from Asia, 40% from Europe and 20% from offshore US. The final allocations were said to be in line with these demand patterns.

Further deals are expected out of Taiwan in the coming weeks and this deal will give those companies comfort that demand is there for correctly structured deals. UMC is thought to be next out of the blocks with a $500 million trade. Further afield, HDFC from India is looking to do a similarly sized convertible in the coming weeks.

For the Taiwanese tech companies, business is certainly picking up, which leaves them in need of new capital to fund operations. Compal has recently reported that its shipments of notebook computers hit a historic high in June and July up 18% on the previous year. The company's president, Ray Chen has increased his forecast for 2005 saying that the company will ship 10 million notebooks this year, one million more than originally foreseen. The forecast for 2006 is 14 million notebooks, a jump of 40%.

Investors could be worried about the effect of a rising Chinese yuan on the margins of these electronics manufacturers, who usually trade on tight profit margins in a very cyclical industry. This is nonetheless refected in the credit spread of the CB issue. The bond floor for the BBB- rated Compal deal is said to be 90. "It is very gratifying to get demand of $1 billion plus for a deal out of Taiwan after market close on a Friday in August," says a banker observing the deal. "It's good to see Taiwan coming back."

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