On the day the Taiwanese stock market suffered its largest single day drop so far this year, the convertible market was boosted yesterday (Monday) by the surprise launch of deals for Taiwan's third largest cellular company and its largest DRAM manufacturer.
Morgan Stanley ran the books for of a $100 million deal for Far EasTone Telecommunications (FET), which was launched and closed within the space of four hours. Clearly demonstrating a new and much more aggressive edge to its Asian ECM operations, the bank marched in and took the deal off Goldman Sachs, which had already filed terms with the SFC and also holds a GDR mandate for the company. In a move, sadly far from uncommon in the region's primary equity markets, it was able to do so by agreeing to hard underwrite the deal and using similarly aggressive terms to its convertible for Taiwanese shipping company Wan Hai Lines last week. The former deal provided a good springboard for FET, which also offers diversification to an investor base jaded by Taiwan's constant stream of tech deals.
Following the award of a mandate on Friday, the deal and a rating from Standard & Poor's were turned around extremely quickly and quietly. The rating agency's ability to move so rapidly has been attributed to its affiliation with Taiwan Ratings, which also upgraded FET one notch to A+ last week. S&P assigned a BBB - rating yesterday, in the process making FET one of the highest rated credits in the Taiwanese universe. Getting a rating and particularly an investment grade rating was to prove important, since the company has a limited free float and limited following with foreign investors, who have never paid much attention to the Taiwanese telecom sector.
Terms comprise a five-year final maturity with a zero coupon structure and 17.5% conversion premium to the stock's NT$30.6 close. This compares to an indicative range of 15% to 20%. Yield-to-maturity came in at 1% compared to a 0.5% to 1% pre-marketed range and there is also a call option in year three subject to a 130% hurdle and put option in year two at 102.015%. Redemption price is 105.114% and there is also a $15 million greenshoe. Fees total 2.5%.
Underlying assumptions comprise a bond floor of 94.8%, theoretical value at par and implied volatility of 26%. This is based on a credit spread of 175bp over Libor, 3.5% dividend yield, zero stock borrow and volatility assumption of 26%. Historic volatility also stands at the same level.
Unable to do any credit marketing for fear of the deal leaking, the lead initially went out with a 160bp credit spread, but widened it to 175bp, a level deemed fair by other market participants. Asset swap demand was said to have covered half the book, which closed at the $260 million level.
Unlike Wan Hai, which was launched into clear market conditions, FET had to bow slightly to unsettled European equity markets and observers report an unusually large number of limit orders in the book. A total of 75 investors were said to have participated, with a geographical split, which saw roughly 50% placed in Europe, 25% in Asia and the balance offshore US.
"Investors seem to have a psychological barrier with deals which try to push bond floors below 95%," says one observer. "This transaction had aggressive terms and they were also a bit edgy about the fact that theoretical value came out at par compared to Wan Hai's pricing around the 106% level."
A second adds, "This is the most expensive deal so far this year. Good credits like FET can extend the put option out to about 18 months at the moment and get away with a zero yield structure. But anything beyond this and investors need some yield to nibble on."
Should FET proceed with plans to launch a GDR offering, investors should also benefit from the availability of stock borrow and will not suffer any dilution since the issue is filed as a secondary share offering. On full conversion, the new deal represents 4.7% of issued share capital in a company, which has free float around the $250 million mark and market capitalization of about $2.2 billion.
Year-to-date, FET is up 18.6%, outperforming the TWSE, which is also up 11.682% and currently ranks as the world's top performer. Outside observers credit the lead and company for having the foresight to give investors the kind of equity story they are looking for and more importantly, timing the upside perfectly. An increasing number of analysts, for example, believe the current rally cannot last beyond the first quarter.
This may also explain why Macronix has decided to take advantage of the plentiful liquidity associated with the beginning of the year. Lead manager Credit Suisse First Boston launched an$80 million deal yesterday and pricing is expected today. Terms comprise a five-year maturity with a zero coupon structure and high equity sensitive based on a conversion premium of 3% to 12%. The deal has four put options - par at year one, 102% at year two, 104% at year three and 106% at year four. Redemption will be at par.
There is also a conversion price re-set at the option of the issuer 30 days prior to each put date at the lower of an average closing price over 10, 15 or 20 days. The deal is being marketed on a credit spread of about 500bp to 600bp over Libor, which will give a bond floor of about 93.7% to 92.7%.