INI steel completes convertible

One of the weakest credits in the Asian convertible universe manages to complete a deal despite a day of immense volatility.

Goldman Sachs successfully cleared a debut $100 million convertible for Korea's INI Steel yesterday (Wednesday) by pricing the deal at the outer end of its indicative range. The deal size was relatively small, but it was nevertheless testament to the lead's skill in being able to hold any kind of book together at all during the worst trading day for the world's equity markets since September 11.

Pricing of the five-year offering came with a zero coupon, a 12.5% conversion premium to a spot close of Won6,400 and a yield-to-maturity of 5.75%. This compares to an indicative premium of 10% to 15% and yield-to-maturity of 5.25% to 5.75%.

The deal also has a three-year call subject to a 130% trigger, a three-year put at 118.54% and premium redemption at 132.77%. There is also a $30 million greenshoe that has been increased by $10 million.

Underlying assumptions comprise a bond floor of 98.6% and implied volatility of 15.1%. This is based on a credit spread of 255bp over Libor, 2% dividend yield, 6% stock borrow cost and 30% volatility assumption.

Books were said to have still closed a couple of times covered with a total of 32 investors and geographical split, which saw 50% placed in Europe, 30% in Asia and 20% with offshore US accounts.

Investors were said to have been particularly sensitive about the yield-to-maturity and indeed, it was the transaction's heavy bond content and phenomenally high bond floor that underpinned success at a time when Asian credit markets remain robust and investors have been moving right down the credit curve in search of yield. As the issue is the first convertible from Korea this year and only the second mainstream debt issue, it also had offered diversity and scarcity value.

The most obvious comparables are INI's sister companies Kia Motor and Hyundai Motor as well as a recent convertible for Hong Kong's Tingyi Noodles. The latter issued a $90 million convertible at the end of May with a similar three-year put and hefty yield of 6.875%. Currently the deal is bid at 1.78% after trading up to 132.4% in the secondary market.

INI has a much weaker balance sheet than both Kia and Hyundai Motor, but given that it has likewise embarked on an aggressive de-leveraging strategy, it should have sat well with investors that have done exceptionally well from the performance of both of the auto manufacturers outstanding straight bond issues over the past year.

For example, Kia Motor, which has a BB/Ba3 rating, issued a $200 million 2006 issue last July to yield 9.564% or 470bp over Treasuries. At Asia's close yesterday, the deal was bid to yield 5.74% or 188bp over Treasuries, equivalent to 174bp over Libor.

In comparison to Kia, INI Steel is clearly a single-B credit and as a result of the debt restructuring resulting from the collapse of the Hyundai chaebol, still has extremely weak ratios. Debt to EBITDA stands at 5.4 times against a 2.1 times for Kia and 1.5 times for Hyundai Motor. A soaring stock price, on the other hand, has made debt to capitalization slightly more presentable at 55% against a 37.7% for Kia and 35.4% for Hyundai.

At the end of 2001, total debt stood at Won1.92 trillion ($1.6 billion) compared to Won2.03 trillion at the end of 2000. Short-term debt amounted to Won758 billion. However, the group has pledged to divest Won2.5 trillion in property and other assets over the course of the year in the hope of completely cleaning up its balance sheet.

Year-to-date the stock is up 71.4% but has shed fractionally under 13% over the course of the last two trading days. This means that it is now lower than the issue price of the shares it has monetized through the deal, which technically classifies as an exchangeable. On conversion, however, the price will be marginally higher than the Won7,185 price the company paid in 2000 from shareholders opposed to its merger with Kangwon Industrial.