CPT prices CB

Third Taiwanese TFT-LCD producer taps CB market in the space of a week.

Chunghwa Picture Tubes returned to the CB market with its second CB of the year yesterday (Wednesday) raising $190 million from a credit-enhanced CB led by ABN AMRO. The deal follows a re-bound in TFT-LCD stock prices, which has already encouraged Taiwan's other two second tier players - Hannstar Display and Quanta Display - back to the market with $140 million and $280 million deals.

However, CPT differs from its two predecessors because it has used a credit-enhanced structure and had to do so for regulatory reasons since it was loss making in 2002. It also needed to raise funds fairly quickly since its $230 million CB of January 2004 is puttable in January 2005 and is currently trading above issue price at 106.125% bid.

Terms for the new deal comprise an issue price of par and zero coupon, with a put option in year 2.5 and a redemption price of 105.36% to yield 2.1%.

The conversion premium was marketed from 52.1% to 56.7% and priced at a huge 54% premium to the stock's NT$13.15 close on Wednesday. Since its high of NT$25.40 in April, the stock has fallen 55%. However, it has risen 15% since its year-to- date low of NT$11.45 on November 1.

There is also a call option after 2.5 years with a hurdle of 125% and re-sets after 6 and 18 months.

Underlying assumptions comprise a bond floor of 96.3%, implied volatility of 32% and theoretical value of 100.8%. This is based on a credit spread of 15bp, zero dividend yield, zero stock borrow and historic volatility assumption of 35%.

The letter of credit is based on ABN AMRO's double A rating and has already been syndicated out at 120bp per annum.

Specialists say about 60 investors participated in the deal, which closed just over three times covered. By geography about 60% went to Europe, 15% to Asia and 25% to the US.

The group's current deal is almost a reverse image of its CB in January, which had a negative yield structure and low premium. This 1.8 year issue had an issue price of 103% and redemption price of par to yield minus 1.6% at launch. It is puttable in January 2005. The conversion premium was set at 12%.

Underlying assumptions at launch comprised a bond floor of around 98%, implied volatility of 24.8% and theoretical value of 104.89%. This was based on a credit spread of 50bp, zero dividend, zero stock borrow and volatility assumption of 30%.

CPT's new deal has a very aggressive conversion premium, but bankers point out that investors are only paying one point per annum for the equity option compared to five to six for Hannstar and Quanta.

CPT is currently trading at one times book and analysts are fairly neutral on the stock given it has recently spiked upwards and there is currently no clarity when the industry cycle may bottom. The most optimistic believe it may happen after the first quarter of 2005 and this has recently pushed up stock prices.

Others, however, believe it will not turn until the end of 2005. CPT Chairman Lin Cheng-hung said earlier this week that he expects supply to exceed demand by 9% to 10% throughout 2005 because of all the 5G capacity coming on stream. But he balanced these bearish comments by adding that prices should only fall a further 5% to 10% before stabilizing.

Flat screen producers have been shifting capacity back to smaller screens for computers after demand for large screen TFT-LCD TV's failed to materialize as early as expected. This has meant that prices for benchmark 15", 17" and 19" screens have all plummeted as capacity from 5G and 6G plants have come on stream and been re-directed.

Panel prices for 19"plus screens all peaked in the first quarter, whereas prices for smaller screens peaked in the second. 17" panels, for example, were commanding an average selling price of $280 in the first quarter, $292 in the second quarter and $222 in the third.

Analysts calculate that is now below the break-even level for all producers. CPT may be one of the few TFT-LCD producers to record a profit in the fourth quarter, however, because it can rely on earnings from its legacy CRT business (Cathode Ray Tube).

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