Fuhwa completes CB

Taiwanese FHC brings first convertible of the year from Taiwan.

Fuhwa Financial Holdings completed a $90 million convertible yesterday (January 19), taking advantage of rampant speculation in its share price to raise cheaper funds and re-finance short-term debt.

Led by its house bank Nomura, the deal was not marketed to a wide range of investors and will be unlisted. Using a five-year, zero coupon structure, the deal was priced at 101% with put options in years two, three and four at 104% and redemption in year five at par.

There is also a call option in year two with a 125% hurdle and a $10 million greenshoe. Marketed terms spanned an issue price of 100.5% to 101.5% and a put price of 103.5% to 104%.

The conversion premium was not marketed on an indicative range and was fixed at 20% to the stock's spot close of NT$17.6. There are annual re-sets.

Underlying assumptions comprise a bond floor of 94.5%, implied volatility of 26% and theoretical value of 100.2%. This is based on a credit spread of 100bp over Libor, full dividend pass through, 5% borrow cost and 100 day volatility of 24%.

About 23 accounts participated in the deal, which closed three times covered. There was said to have been little asset swap activity and only 20% was placed with hedge funds.

Two striking aspects of the deal are the aggressive implied volatility levels and relatively low conversion premium considering the deal incorporates re-sets. Specialists say the former was possible because it was balanced by a defensive bond floor.

Most investors were buying the deal on an outright basis keen to get exposure to potential M&A upside. They were also protected through a series of M&A clauses incorporating a range of put options with a strike price of 104%. These can be triggered if there is a change of control, or through a merger de-listing.

Fuhwa also appears to have protected itself from potentially hostile acquirers by delaying conversion for five-and-a-half months. This means the deal cannot be converted into stock until after a board re-shuffling in June.

Many observers are waiting to see if a fight for the FHC develops between Yuanta Core Pacific and Chinatrust. Fuhwa FHC is the fourth smallest in Taiwan, but has a lucrative niche in margin financing with a 13% market share.

Its majority owner is believed to the KMT with a 20% stake, followed by the Ministry of Finance with a 14% stake. Over the weekend, local newspapers quoted the President of Yuanta Core Pacific saying it had now accumulated 20% of Fuhwa in the open market.

One day later, however, the statement was retracted and an official from Taiwan's largest securities firm said the group only owned 9% of Fuhwa up from 8% at the beginning of 2004. Likewise Chinatrust has denied reports that it has managed to purchase the KMT's stake.

The Taiwanese government is keen to cut the country's 14 FHC's by half over the next two years and Fuhwa is an obvious acquisition candidate given its easily digestible size and current shareholding structure.

Unsurprisingly its share price has rocketed from a low of NT$11.83 in July to NT$17.60 at Wednesday's close. This values the group at about 1.2 times book value and roughly 18 times 2004 earnings.

The group has three main areas of operation: margin financing, which accounts for about 45% of overall revenue; commercial banking, which accounts for about 32% and securities broking, which accounts for the remaining 23%.

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