Lead manager Nomura completed a $90 million exchangeable for Fuhwa Securities Finance into Fuhwa Financial Holdings yesterday (Wednesday). The deal was necessitated by government regulations regarding the disposal of Treasury shares and in order to meet a 2005 deadline, the transaction has an abbreviated maturity.
Terms comprise a one-year maturity (effective 10-month conversion period) embracing a call option on or after December 13 2004 and redemption on January 15 2005. There is no put option. The zero coupon deal was priced at 101.5% with redemption at par to give a negative yield of 1.4%.
The conversion premium was set at 18.3% to the stock' spot close of NT$11.45 or 19% to a five-day moving average. There is also a $10 million greenshoe.
Underlying assumptions comprise a bond floor of 97.3%, implied volatility of 29.5% and theoretical value of 102.5%. This is based on a credit spread of 125bp over Libor, 5% borrow cost, full dividend pass through (with downward adjustment for cash dividend) and 250 day volatility of 32.7%.
Historic volatility is said to have remained flat since July. Observers note that while the deal has a relatively aggressive volatility structure, this is counterbalanced by a low conversion premium. In secondary market trading, however, the deal went on to trade through historic volatility, ending Asia's trading day at 103.25% to 104.2%.
Books are said to have closed 10 times covered with participation by 25 accounts. Because Fuhwa is not very well known among international investors, the deal was not widely marketed and roughly 70% of paper was placed in Asia, with only 30% going to Europe. A large proportion of the Asian accounts were also offshore Taiwan asset management companies familiar with the stock.
About 30% is thought to have been asset-swapped.
The most unusual aspect of the deal is its structure as an exchangeable by an unlisted vehicle into a listed one, a first for Taiwan. This derives from the creation of Fuhwa Financial Holdings via a share swap with Fuhwa Securities Finance, which saw the holding company replace the securities arm as the listed entity on the Taiwan stock exchange.
Observers add that an exchangeable structure incorporating an unlisted vehicle has enabled a much cleaner and swifter disposal of the Treasury shares created by the formation of the FHC. There are lesser due diligence requirements and no need for a prospectus.
"This is the first time this structure has been used in Taiwan," says one, "But it makes much more sense for FHC's looking to dispose of Treasury shares."
On full conversion, Fuhwa will sell 9% of the group's issued share capital. The remaining number of Treasury share it still holds has not been disclosed. Prior to the transaction it had a 60% freefloat and market capitalization of about $1 billion.
During 2003, Fuhwa underperformed the Taiwan market, rising 16% compared to 21% for the banking index. Specialists believe the deal is an implied BB rating and it has a BBB rating from Taiwan Ratings.
In a report published last year, the agency commented that Fuhwa Securities has the strongest financial profile of the whole group on a stand-alone basis.