Taiwanese flat panel producer Hannstar Display Corp completed an increased $140 million convertible via UBS on Monday. The deal represents the first time a TFT-LCD manufacturer has accessed the international capital markets since LG Philips LCD completed a dual listing in New York and Seoul in mid-July.
The sector has been in freefall since mid-April, with Hannstar down almost 60% from its year-to-date high of NT$24.20 on April 19. Tech specialists say market participants remain equally divided between those who believe the sector could fall another 20%, those who believe it will be range-bound for another quarter and those who are starting to bottom fish.
The new deal was clearly targeted at the latter category and unsurprisingly had a highly concentrated order book, with 70% of the deal going to just 10 investors and the remainder to a further 30 investors. It is said to have closed about two times covered.
Timing was chosen to co-incide with a slight bounce in the company's share price, which hit a year-to-date low of NT$9.10 on November 8, when the Taiwanese authorities announced that they were investigating a group of companies, including Hannstar, for sudden and steep declines in profits guidance.
Initially the company filed for a combined GDR and convertible offering, but decided to leave the equity portion in the hope of better days. The CB was also initially slated to be about $230 million, but the lead sensibly went out with a lower issue amount in the hope of generating momentum. As a result, it was able to increase it from $120 million with a $30 million greenshoe to $140 million with a $30 million shoe.
Aside from the sector, the second biggest challenge facing the deal was the lack of a credit bid. Thanks to a run on Taiwan's massively obese bond fund industry earlier in the summer, the domestic bond markets have had a difficult time since then.
This meant the lead went out with no asset swap and targeted the deal at investors who know the company well and were prepared to take a purely directional view.
"There was no messing around with this deal," says one observer. "It was marketed as a fixed price offering to a core group of accounts that know the company and had a very clear idea about where they were prepared to buy it. On a technical level, it was very expensive, so it would have only appealed to directional buyers."
Specifically this concerns paying 11 points for a 20 month equity option. Terms comprise a par in par out, zero yield structure. The conversion premium was set at a 15% premium to a five-day average of NT$9.80 (about 0.8 times book value).
This was lower than the spot price and the company is said to have ceded it because it wanted to make sure it could achieve a 20 month put, which would push potential re-payment into the third quarter of 2006 at the earliest. This is hardly surprising given the depleting net cash positions of the TFT-LCD manufacturers and the likelihood of earnings losses over at least the next two quarters.
According to Deutsche Bank research, Hannstar had a cash balance of NT$17 billion at the end of the third quarter. The German bank estimates that the company will not start running balance sheet risk until the second quarter of 2005 and estimates that it could amass a cash balance of NT$32 billion in 2005 thanks to the beginning of depreciation on its Gen 5 fab. It has, however, also scheduled NT$20 billion in capex next year.
In addition to a 20-month put, there are also put options after 32 and 44 months. There is a call option after 20 months subject to a 120% hurdle and re-sets in months nine, 21 and 33.
If the company goes ahead with its GDR offering, terms on the convertible will be adjusted likewise.
Underlying assumptions comprise a bond floor of 89%, implied volatility of 28% and fair value of 103%. This is based on a credit spread of 400bp, 5% borrow cost, 0% dividend yield and 35% volatility assumption.