Asia Cement last night issued an exchangeable bond into Far Eastern New Century, which was the fourth Asian equity-linked deal to be completed this week and a near repeat of an exchangeable bond sold by Asia Cement three years ago. That bond was exchangeable into the same underlying entity, although back then it was called Far Eastern Textile. Asia Cement and Far Eastern New Century are based and listed in Taiwan.
Yesterday’s deal was marketed at aggressive terms, including a yield range that stretched to a negative yield at the tight end, but still attracted more than $1 billion of demand. That allowed the three bookrunners to upsize the offering to $375 million from $350 million, making partial use of the $52.5 million upsize option that was flagged at launch. However, the terms were all fixed at the investor-friendly end. In all, about 90 investors participated in the transaction.
Being a Taiwan deal, there were plenty of asset swaps available. Supposedly local banks had been offering to back the exchangeable since it became public knowledge through a regulatory filing in December. However, one source said the buyers weren’t too aggressive about taking up the asset swaps straight away – the simple fact that they were available seemed to be enough for many investors. That said, about two-thirds of the bonds were bought by hedge funds, suggesting more asset swaps may well be taken up later on.
A producer of cement and other building materials, Asia Cement is viewed as a blue-chip credit and is already well known by convertible bond investors because of its previous exchangeable. That previous bond was put back to the issuer last summer and, while the share price hadn’t performed well enough to trigger conversion, the bondholders were comforted by the fact that the issuer had no problem meeting its redemption obligations – which has not been the case for several other Taiwanese issuers that sold equity-linked debt before the recent financial crisis.
Another attraction of the deal was the fact that the underlying entity is neither a tech company nor a consumer recovery story. Rather, Far Eastern New Century manufactures and processes a variety of textile products and is viewed as a soft commodity play. Its share price has rallied 68% since May last year. The company is the original business of the Far Eastern group and is linked to Asia Cement through a cross-shareholding structure.
The bonds have a five-year maturity, but can be put back to the issuer on the third anniversary. They were marketed with a fixed zero percent coupon and a yield ranging from a negative 0.5% to 0%. The conversion premium was offered at 30% to 40% over Far Eastern’s closing price of NT$48.85 yesterday. After about three hours of marketing the yield was fixed at 0% and the conversion premium at 30%, for an initial conversion price of NT$63.51.
The 30% premium is equal to that on both Epistar Corp’s $280 million CB and Essar Energy’s $500 million CB earlier this week. Essar Energy too fixed the premium at the bottom of the indicated range at 30% to 35%, while Epistar offered a premium between 25% and 30% and fixed it at the top. Either way, it seems investors are hesitant to accept more than a 30% premium at the moment – in this case perhaps partly due to the recent sharp gains in the share price. And while quite a few investors were okay with a negative yield, there wasn’t enough demand at that level to support the entire deal.
The fact that the exchangeable was quoted at or just above par in the grey market last night suggestd that the bookrunners made the right call not to push it further – either on the premium or the yield.
The terms were also an improvement on Asia Cement’s previous exchangeable. That bond, a $210 million five-year deal with a 2.5-year put that was completed in mid-February 2008, came with a zero percent coupon, a 0.875% yield and a 30% conversion premium.
The new bond was marketed at a credit spread of 185bp and a 5% stock borrow cost. Bond holders will be compensated for all cash dividends. At the final terms, this gave a bond floor of about 91% and an implied volatility of 32.5%.
Asia Cement said it will use the proceeds from the deal to buy coal and other raw materials and to repay outstanding debt.
Goldman Sachs was the global coordinator for the trade and a joint bookrunner together with Citi and UBS.