E.Sun ushers dawn of new age for Asian CBs

Asian convertibles enter an era of negative yields for primary market deals.

In an increasingly familiar pattern, a Taiwanese financial holding company launched and executed a heavily oversubscribed offering within the space of a few hours yesterday (Monday). E.Sun Financial Holdings raised $160 million via lead manager Morgan Stanley in a deal that closed 8.3 times covered after only three hours and the imposition of a $10 million to $15 million cap on individual orders.

Declining interest rates mean that many Asian convertibles trade on negative yields, but until yesterday no deal outside of Japan has been priced with one. Terms for E.Sun's one-and-a-half-year deal, however, show just how high the convertible market is riding at the moment, with global issuers taking advantage of low interest rates and rising share prices, yet still unable to meet overall investor demand.

Terms comprise an issue price of 101%, zero coupon, redemption price of 100% and one-year put at 100% to give a yield-to-put of -0.99%. Similar to the issue price, the conversion premium was also set at the aggressive end of its pre-marketed range to come out at 24% to a spot close of NT$15.9. There is also a $20 million greenshoe and one-year call option subject to a 115% hurdle.

Underlying assumption include a bond floor of 96.7%, implied volatility of 27.3% and theoretical value of 103.7%. This is based on a credit spread of 110bp over Libor, no dividend, no stock borrow and credit rating of Baa3.

Nevertheless, just like all its predecessors, E.Sun's deal drew immediate criticism for its high bond floor, even though the deal does have a short maturity. A number of market participants argued that terms could have been pushed tighter, drawing attention to initial secondary market trading, which spiked up to 102.875% - 103.625%.

All the recent Taiwanese CBs, however, have followed a similar pattern of trading up in the immediate aftermarket and then settling comfortably at the level they hit within a day or two of breaking syndicate. In E.Sun's case, the lead is also likely to have been slightly more cautious than normal because of the many innovative aspects of the transaction, which might unsettle investors.

As well as the novel concept of negative yield, the deal has a number of other bells and whistles. These include cash settlement, enabling the issuer to cash out undesirable investors it wishes to exclude from share ownership on conversion.

The deal also has two re-sets at the option of the issuer. The first is a standard re-set with a 80% floor. The second one enables E.Sun to issue equity at a discount 30 days prior to maturity, by re-setting the conversion price to a maximum 9% discount to the prevailing spot price of the underlying shares.

But the least investor friendly inclusion is a 150 day bar on conversion, which was inserted to reduce the impact on EPS over 2003. Indeed, the whole transaction was very specifically tailored around E.Sun's desire to get rid of the treasury shares created by the establishment of a financial holding company structure in January 2002.

The deal is said to be equivalent to be about 10% of the company's issued share capital and on full conversion all the treasury shares backing the deal will be converted into primary stock. The company currently has a large freefloat of 60% and a market capitalization of roughly $1 billion.

Earlier this year, Citigroup was mandated to lead a novel equity-linked transaction through which E.Sun hoped to bring an international strategic investor into the group. Although no deal transpired, rumours of M&A activity pushed the group's share price up to a high of NT$19.7 in early to mid February.

E.Sun has no single dominant shareholder and the chairman has previously said that while E.Sun does not wish to be acquired or controlled by another financial group, it is willing to sell up to 30% to a strategic overseas partner. Analysts have also said that the group needs to do something to expand its franchise, since it only controls 1.2% of domestic banking system assets.

In a recent ratings release, Taiwan Ratings commented that E.Sun has "above average asset quality, satisfactory profitability and adequate capitalization.

"Nevertheless," it added, "these strengths are somewhat moderated by the bank's small market position, unbalanced revenue profile and the increasing competition in Taiwan's banking system."

At a current share price of NT$15.9, E.Sun is still up 4.61% on the year, compared to a 6.5% rise for the overall index. The group is also still trading at a slight premium to the 1.36 times price to book average of the Taiwanese banking sector.

About 90 investors are said to have participated in the deal and by demand the deal had a rough geographical split of 60% Europe, 25% Asia and 15% offshore US. Just under half the book was set to be allocated to asset swap.

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