INI Steel launches convertible

Goldman Sachs brings a new name to the Korean credit universe.

The US investment bank launched a $100 million convertible for Korea's largest specialist steel manufacturer yesterday (Monday).

At a time when the straight debt markets are readily absorbing high yield names from the right Asian credits, the combination of a Korean country tag and Hyundai Motor ownership tag is expected to play well with investors. Year-to-date, there has also been just one straight debt issue from the country for the Korea Development Bank and no convertible issuance at all.

For investors, the deal should, therefore, provide welcome diversification from a heavy pipeline of Taiwanese issuers. However, it will also test the outer limits of investor appetite for sub-investment names towards the bottom end of the credit spectrum. The deal does not have an international rating, but it does have a BBB+ rating from KIS (Korea Investor Services) and a weaker balance sheet than both Hyundai Motor and its sister company Kia Motor The former is currently rated BB+/Ba2, while the latter is rated BB/Ba3, thereby positioning INI right on the border of single-B territory.

Technically the new offering ranks as an exchangeable as the company is hoping to reduce debt by monetizing the value of shares purchased in 2000 from shareholders opposed to its acquisition of Kangwon Industrial Company. Terms comprise a five-year premium redemption structure with a zero coupon, 10% to 15% conversion premium and yield-to-maturity of 5.25% to 5.75%.

There is also a three-year call subject to a 130% hurdle and three-year put at 116.82% to 118.54%. In order to tempt investors to hang on beyond the put date, premium redemption steps up to between 129.58% and 132.77% in year five. There is also a $20 million greenshoe.

Underlying assumptions incorporate a bond floor of 96.7% to 98.2% and implied volatility of 15.1% to 20.4%. This is based on a credit spread of 255bp over Libor, 2% dividend yield, 6% stock borrow cost and 30% volatility assumption. Historic (260 day) volatility veers from 48% to 62%.

Even at the tightest end of the range, the deal will have the highest bond floor of any convertible issue this year and also one of the lowest conversion premiums. This latter aspect is a reflection of a stock price, which has run up 84.3% so far this year to close Monday at Won7280.

But the defensive structure is mainly a function of the group's credit standing, although the credit itself is fairly straightforward to price since both Hyundai and Kia have recent bond issues outstanding. Hyundai, for example, is currently trading at 167bp over Libor for a December 2005 maturity, while one-notch lower rated Kia is trading at 180bp over Libor on a July 2006 maturity.

Like all Hyundai Motor group companies, INI Steel is pursuing an aggressive de-leveraging strategy and has said that it hopes to sell-off $200 million in non-core property assets and related securities over the course of the year to pay down additional debt.

The company now maintains an interest coverage ratio of 2.1 times compared to 1.8 times in 1999 and according to KIS had a net gearing ratio of 168% as of June 2001 and a debt to capitalization ratio of 49.86%.

The deal will represent roughly 12% of the company, which has a market capitalization of $735 million and trades about $5 million a day. Pricing is scheduled for Wednesday.

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