Compal re-opens convertible market

And does so with aggressive terms.

Asia's first tech deal since July has been completed following the pricing of a $345 million (including shoe) convertible for Taiwan's Compal Electronics early last Friday Asian time. The transaction came at the wide end of its indicative range, but terms were felt to have been pushed as far as investors would allow them and were supported by aggressive credit appetite from lead manager Salomon Smith Barney, which benefits from a strong presence in the domestic banking sector.

Terms comprised a zero coupon, five-year deal with a conversion premium of 21% to a volume weighted average price of NT$30.20 on October 3 and redemption price of 114.63%. There are also three-year call and put options, with the former subject to a 130% hurdle and the latter priced at 108.54% to give a yield-to-maturity of 2.75%. This compares to an indicative range of 20% to 24% for the conversion premium and 2.4% to 2.75% for the yield.

The backdrop to the deal is a stock market, which is down roughly 26% on the year, a sector that has significantly underperformed the overall market and an investor base, which has consequently lost money on just about every single convertible launched in 2002.

As a result, observers say that whereas investors were previously willing to pay seven points for the equity option on a non-hedgeable stock, they are now unwilling to pay past five points. To get a bond floor of 95%, Salomon Smith Barney, therefore, bid the BBB- rated credit at 175bp over Libor. This level was said to be about 5bp to 10bp tight of general market consensus, with the deal bid at 185bp over within a day of launch.

A degree of credit subsidy meant the deal could be stripped where hedge funds were willing to pay for it and also satisfy the issuer's pricing expectations. Asset swap credit bids were said to have accounted for about half the deal, although a number of funds seeking full asset swaps got scaled back.

Underlying assumptions include fair value of 110% and implied volatility of 24%. This is based on the 175bp credit spread, 1.38% dividend yield, 5% stock borrow cost and historic volatility of 45%. With a 185bp credit spread, the bond floor shifts to 94.76%.

Books were said to have been two times oversubscribed within six hours of launch and the deal had a subsequent geographical breakdown of 15% US, 20% Asia and 65% Europe. There was said to be little appetite from fixed income accounts, with the majority of the book either outright or hedge funds. About 80 accounts participated in total.

Pricing was complicated slightly by the performance of Compal's GDR, which closed London trading at a 6.5% discount to the underlying and meant that the convertible was effectively priced at a 29% premium.

At $345 million, Compal represents the largest Taiwanese tech deal since Hon Hai in November 2000. Some bankers felt the deal was about $50 million too large given current market conditions. And the poor state of the underlying market and issuersÆ reluctance to bring new deals at depressed equity prices, meant that it was important it traded well.

The aggressive range meant that the transaction traded down a quarter of a point in the grey market and stayed there shortly after launch. By the end of first day trading in Asia, however, it was said to have hit 100.125% to 100.375%.

Many will hope the deal's success persuades other issuers to accept market reality and re-invigorate the pipeline. Many Taiwanese issuers are said to be holding back because of heavy falls in their stocks prices, but observers say it is to Compal's credit that it decided to move forwards and will have undoubtedly gained a first mover advantage in doing so.

The deal also solidifies Salomon's reputation in Taiwan and its relationship with a client, which has typically used Goldman Sachs for international equity raisings in the past, although Citigroup has always had very close domestic banking relationship.

Compal has slightly outperformed the TWSE so far this year, falling 21.27% to Thursday's NT$29 close and been fairly range-bound around these levels since the middle of July.

Most of the company's revenues derive from notebook manufacturing (70%) compared to 18% from LCD monitors. Analysts say the stock price has been bolstered by improving sales figures, although margins have been coming down because of pricing pressures. In particular, the group is vying to oust Quanta as the world's largest notebook manufacturer and is forecasting revenues of NT$100 billion ($2.86 billion) for the first time this year.

With NT$9.64 billion in revenue for September, Compal has just enjoyed its second largest month on record and is taking full advantage of a head start with its manufacturing facilities in China and hopes to increase production of notebooks on the Mainland from 40% to 70% next year.

However, as a result of depressed margins, the company saw net income fall to NT$1.9 billion at the end of the second quarter from NT$2.1 billion the same time last year. Over that period, gross profit margins fell from 9.8% to 8.6%.

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