Hannstar follows ProMos to the convertible market

Another day another TFT-LCD transaction from Taiwan.

Flat screen panel producer Hannstar Display Corporation returned to the international equity markets for the third time this year with a heavily subscribed convertible via house banks Credit Suisse First Boston and ING. Providing markets continue to move up, accounts appear willing to hoover up the entire primary markets pipeline and books for Hannstar's deal closed 15 times subscribed after only two-and-a-half hours.

Terms were also aggressive relative to recent deals, with the put option pushed out to two years without a corresponding increase in yield and the bond floor dropping below 90%.

Terms for the $225 million deal comprise a zero coupon deal, with a par in par out structure and zero yield. The conversion premium was fixed at the top end of the range, coming at a 20% premium to the stock's NT$14.3 close.

Because the company is looking to get equity on its balance sheet, there is a call option after one year subject to a 145% hurdle, dropping to 125% after two. There is also a first re-set after six months and annually thereafter subject to an 80% floor. In addition, the deal incorporates a special re-set at the issuer's option to the higher of 90.91% of market price, or par value.

The first put option falls after year two at par and annually thereafter. There is also a $25 million greenshoe.

Underlying assumptions comprise a bond floor of 89.7%, theoretical value of 102.9% and implied volatility of 34.7%. This is based on a credit spread of 350bp over Libor, zero dividend, zero stock borrow and 58% volatility.

Over 200 accounts were counted in the order book and observers say they were surprised by the strength of outright demand. As a result, less than 10% of the deal is thought to have been asset swapped.

About 40% of the deal is said to have been placed with investors that participated in the company's $125 million convertible in February and its $175 million GDR in July.

Back in February, the company had to use an annual puttable structure and priced with a 10% conversion premium to an NT$11.72 close. At launch, the deal had a bond floor of 94.86%, theoretical value of 110.54% and implied volatility of 12.69%.

This deal is now in-the-money and bid around the 123% level. Likewise, the new convertible was already trading up at 102% to 103% in the grey market.

Year-to-date, Hannstar is up 38.16%, trailing the spectacular stock price performance of most of the rest of the sector. It is still only just above 2003 book value, whereas Taiwan's largest producer, AU Optronics, is now quoted at just over two times.

Prior to Hannstar, the last convertible from Taiwan was a $94.5 million credit enhanced deal for ProMos Technologies, which was priced on Friday via ABN AMRO (global co-ordinator) and JPMorgan (joint books).

A credit-enhanced structure was used because the DRAM manufacturer recorded negative net earnings during 2002. The Letter of Credit (LoC) provided by ABN AMRO was also purchased directly by the issuer, as there would have been very little demand for its stand-alone credit in general syndication.

Terms comprise a five-year deal with an issue price of 105%, zero coupon and par redemption. The conversion premium came at the top end of the marketed range between 12% and 17% to price at 17% to the stock's NT$14.65 close.

There is a very short-dated call option, which falls after six months subject to a 125% hurdle. The put option is set after one-year at par to give a yield of minus 4.82% to the put or minus 0.97% to maturity.

There are automatic re-sets at six and 18 months subject to an 80% floor, plus a special re-set at the issuer's option prior to the put and maturity date. Fees total 2.25%

Underlying assumptions comprise a bond floor of 93.80%, theoretical value of 110% and implied volatility of 24.5%. This is based on credit spread of 20bp over Libor, zero dividend, zero borrow and a 40% volatility assumption. The credit spread is based on ABN AMRO's AA- rating.

The heavy equity tilt of the deal reflects the fact that the company had originally intended to complete a GDR and wants to get equity on its balance sheet. The undemanding terms together with a strong underlying credit, rising stock market and volatile tech name played well with investors. Book closed 10 times oversubscribed with participation by 150 investors.

Year-to-date, ProMos is up 52.60% and currently trading on a price to 2003 book valuation of 1.57 times. Tech specialists highlight the remarkable resilience of the stock price on a fundamentals basis, since ProMos is currently without a technology partner after falling out with former shareholder Infineon.

Proceeds from the convertible are being used to purchase new machinery and equipment for its 12" fab.