Gigasolar beats deadline for dollar CB

Taiwanese solar cell manufacturer manages to close its debut overseas convertible bond three weeks before a regulatory deadline.

Taiwanese solar cell manufacturer Gigasolar Materials made its international bond market debut on Tuesday, printing a $110 million convertible bond less than a month before its regulatory approval expired.

The transaction joins a recent streak of issuers, which have tapped the equity-linked market ahead of potential US interest rate hikes.

There have now been four equity-linked issues over the past two months including Gigasolar, underscoring ongoing investor demand in the wake of last year’s decline in supply by about one third to $4.9 billion, the lowest level since 2012.

Last year’s volume was also highly concentrated in two large trades – Baosteel’s $500 million exchangeable bond into CCB and China Overseas’ $1.5 billion exchangeable into COLI. Together they accounted for over 40% of the total.

As such, the recent spate of new issues, including Kakao’s $200 million exchangeable into Loen Entertainment and SMIC’s $450 million convertible, should be helping to quench investors thirst, although more deals will needed to cover an estimated $5.9 billion in redemptions across Asia ex-Japan this year.

Sunny days ahead for Gigasolar’s share price?

The timing of Gigasolar’s convertible was dictated by the expiration of its regulatory approval on July 12. The company is no stranger to the asset class, having issued an NT$180 million ($60 million) domestic deal in 2014.

But the two lead managers on the new deal  - joint bookrunners BNP Paribas and UBS - had to make a tough call since the stock has been largely on a downward trend since December.

Gigasolar share price reached an all-time high of NT$750 in late December but has retreated by nearly 40% since then, closing at NT$459.5 on Tuesday. The stock has experienced a particularly steep decline since late May following reports of an internal power struggle among senior management.

This meant the new deal needed fairly investor-friendly terms relative to the indicative terms contained in its regulatory filing.

The company launched the trade with a base size of $100 million and a conversion premium of 15% to 20% over the Tuesday close, compared to a maximum premium of 40% based on the regulatory filing.

The deal was also launched with an upsize option of $25 million, which was partially exercised. The company has a further 30 days to exercise the remainder.

The zero-coupon convertible bond was issued with a standard five-year, three-put structure with full dividend protection and a backend indicative yield of 1% to 1.5%. It also features an issuer call after three years subject to 130% trigger.

Final pricing of the bond was settled at the widest end of indicative terms. The conversion premium was fixed at 15%, translating to a conversion price of NT$528.43.

The yield-to-put and yield-to-maturity was also priced at 1.5% yield, equating to a put price of 104.59% and redemption at 107.76%, according to a source familiar with the situation.

To entice investor interest in the relatively unknown credit, the joint bookrunners lined up three-year US dollar asset swap of $100 million, which was sufficient to cover the entire offering at the base size.

One bond trader told FinanceAsia the asset swap was offered at 250bp/235bp while stock borrow was limited. There was also a significant short position in the secondary market since the bond issue has been well flagged.

Given the large asset swap attached to the deal, there was no grey market trading immediately after launch suggesting a large part of the equity option might have already been swapped.

Underlying assumptions comprise a bond floor of 92.8% to 94.2% and an implied volatility of between 21% and 27%, based on a credit spread of 250bp, stock borrow costs of 500bp and 3% stock slippage.

Gigasolar’s new dollar bond ties in with its strategy of expanding outside of Taiwan. The company said it will use proceeds for the procurement of overseas raw materials, investment in China and for the construction of solar power plants in overseas markets.

Earlier this year, the company announced plans to construct a 2.4-megawatt solar power plant in Japan and another 40-megawatt facility in the Philippines.

A number of local analysts have also recently issued research reports suggesting the stock is undervalued. Masterlink, for example, highlighted the fact that it is trading at only 11 times forecast 2016 earnings compared to a historical average of 14 to 20 times.

The stock is now back to where it was about a year ago and local analysts say that business should improved now it has resolved raw material shortages for its front-side sliver paste business. They also point out that power plant sales are also growing strongly. 

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