Using a Goldman Sachs' proprietary structure, Stock Indexed Zero Coupon Securities (SIZeS), the company launched a $130 million convertible yesterday (Thursday). Initially, it had been hoping to raise up to $300 million from a combined convertible and DR offering, but ruled out the latter option after realising that investors would demand huge discount pricing to spot.
With a five year final maturity subject to annual puts, the convertible has a par in par out structure, meaning that the bonds carry a zero coupon and zero yield to maturity. "Investors like this because there is no downside risk," says one convertibles analyst. "Whatever happens, they can get out at par."
Other terms comprise a premium of 12% to 17% and three year hard no call, thereafter subject to the 130% trigger. There is also an $18 million greenshoe.
Investor presentations will begin in London today, with further presentations in Europe on Monday and the US on Tuesday. Observers comment, however, that the deal is likely to be priced before the weekend. "There doesn't appear to be massive demand, but enough of a shadow book that will see the deal priced pretty quickly," says one Hong Kong-based syndicate head.
Bankers say that the deal has a fair value of 103 to 108, using an implied volatility assumption of 25%. "At the very worst, investors will get their money back at the end of the year, but should the stock start to perform, they stand to do very well," one comments.
"For the company, on the other hand, a worst case scenario will at least see it able to achieve zero cost financing for one year, when normally it would be looking at about 8%," the banker continues. "In a best case scenario, however, it will have been able to sell equity at a 17% premium."
The continued poor performance of the Taipei Weighted Index, now down 31.29% on the year, has led to rapid premium widening in the existing Taiwanese CB universe. Explains one analyst from Lehman Brothers in London, "The Taiwanese market has changed quite dramatically over the last few weeks. Traditionally, it has been the most equity sensitive market in Asia, with very low yield assumptions on the part of investors who regarded it as Asia's safe haven."
"Now," she says, "premiums have massively blown out. Where one month ago the average weighted premium was 40%, it is currently 132%. Convertibles are showing very little option value and are all trading on bond value. The zero coupon issues launched at the beginning of the year are all trading below par and credit has become much more of an issue."
Some bankers question whether companies fully realise the re-financing risks they open themselves to with rolling put structures. "From a corporate finance perspective it's a lousy solution," one argues. "It only makes sense if a company is pursuing a monetisation strategy by selling down a holding through an exchangeable structure."
Where Compal is concerned, specialists conclude that the deal has been fairly valued in current market conditions. Investors are also already familiar with the company since it had a $95 million 1% convertible due 2003 outstanding until November last year when it was called.
In the last four months, the company has had to stomach a roughly 50% drop off in its stock price. Closing yesterday at NT$41.3, the stock has partly been hit by volatile DRAM prices and evidence of slowing PC demand, that has prompted profit warnings from Intel, Apple and Dell
"The whole sector is trading on a p/e ratio of about 10 times 2001 earnings," says one analyst. "On a fundamentals basis, Compal probably has an upside of about 70%. Unfortunately, Taiwanese retail investors are not looking at fundamentals, but politics and no-one can say where the bottom might be."
Last year, Taiwan's top five notebook manufacturers, shipped 9.37 million units and have forecast that the total will increase to 14 million this year. Analysts say that Compal itself has forecast shipments of 1.6 million units and expects the figure to grow again next year by a further 25% to 30%. To the end of the third quarter, however, it had only achieved 59% of its target.
"The company has been quite good at diversifying its client base and added Toshiba to its roster at the beginning of the year," one analyst reports. "Where it has not been so adept is in diversifying its product base to give itself more of a buffer. Telecoms products, for example, still only account for 1% to 2% of sales."
