Korea's Taihan executes rare equity-linked deal

The manufacturer of cables and wires sells $410 million of CBs and bonds-with-warrants after another weak day in the markets.
KoreaÆs Taihan Electric Wire yesterday braved a sluggish market with the sale of Eur280 million ($410 million) of equity-linked debt to cover last weekÆs acquisition of a stake in Italy-based Prysmian Cables & Systems from a private equity unit of Goldman Sachs.

The Eur392 million outlay for a 9.9% stake in Prysmian, which specialises in high value-added technology products such as submarine cables and extra-high voltage cables, and ranks as the worldÆs largest cable company, was paid in cash. However, yesterdayÆs transaction will allow Taihan to refinance its short-term credit lines and ensure its cash position remains in good shape, sources say. The Korean company makes cables and wires for the power and communications industries and also has a stainless steel business.

The deal comprised Eur170 million of convertible bonds and Eur110 million of bonds with non-detachable warrants. The two issues have identical yields, can be exchanged for equity at the same price and have virtually the same structure except for a lower reset floor on the warrants. According to sources, investors were likely to be allocated with both CBs and bonds-with-warrants on a pro-rata basis.

In fact, the only reason the company chose to use two separate structures is that it wasnÆt able to do the full deal size in the form of CBs without seeking approval from shareholders. The combined structure used up most of the boardÆs pre-approved mandate with regard to both CBs and bonds.

Lehman Brothers acted as sole bookrunner. The US investment bank bought the entire offering shortly after the close of Korean trading and then sold it on to the market at a fixed price. Lehman also acted as a financial adviser to Taihan with regard to the Prysmian acquisition.

TaihanÆs share price has had a good run this year with a 175% gain year-to-date. It jumped 26.2% in the first four days after the Prysmian transaction was announced on November 6 to reach a record close of W90,000. All those gains have been lost since, however, amid general weakness in the broader Korean market and in Asian equities overall. Yesterday the stock fell 5.2% to W63,800, but with sources noting that the company wanted to get the deal done before the Thanksgiving holiday in the US later this week, yesterday may have seemed like a good enough window. From the issuerÆs point of view, the fact that the share price has been on a downward trend for the past week may have contributed to a sense of urgency.

However, despite the recent volatility, investors liked the deal and a source said last night the combined issue was more than three times covered. The CBs traded up to 101.00 in the aftermath. Because the deal was done as a Korean private placement, the number of investors had to be capped at 50, but there was no information last night on how many actually participated.

One reason for the enthusiasm is likely to have been the thin issuance volume of equity-linked paper from Korea. Aside from last monthÆs $1 billion exchangeable by KCC Corp into three different underlyings, which was arranged by JPMorgan on a sole basis, there have been only two other CBs this year: a $550 million Morgan Stanley-led offering by LG.Philips LCD in April; and an upsized Eur160 million ($215 million) deal for Ssangyong Motors in June that was bookrun by Barclays Capital. Bonds-with-warrants are even rarer.

But perhaps even more importantly from a demand perspective, Taihan has issued a CB once before, which, according to an observer, was a ôreal blowoutö and made investors a lot of money. Issued in 2005 through Lehman and ABN AMRO Rothschild, that bond is currently deep in the money and has only a small portion left outstanding.

YesterdayÆs issue û this goes for both the CB and the bonds-with-warrants û had a five-year maturity with a two-year put and pays no coupon. They can be exchanged for equity after the first year and there is an issuer call after two years, subject to a 130% hurdle, to force investors to convert or exercise the warrants.

The yield to put/maturity was offered at a fixed 3.125%, while the conversion premium was set before launch at 33.2% over yesterdayÆs close. The warrants attached to the bonds can be exercised at the same price as the CBs and each warrant will entitle the investors to the same amount of shares as one CB. The conversion price will be reset after one year to the average market price at the time, but will be no lower than 90%. The same is true for the bonds-with-warrants, although here the floor is 85%. The reset would have been helpful when it came to convincing investors to accept a premium above 30%.

Because regulations stipulate that holders must be able to settle the warrants in cash, there is a feature that allows the issuer to redeem the bonds that may be left outstanding after the warrants have been exercised. However, the bondholders themselves may also request that the issuer redeems the bonds and then applies the redemption price to cover the cost of exercising the warrants on behalf of the bondholder.

Lehman Brothers provided no credit bid for the transaction, but indicated that a spread of 325bp was ôappropriateö and most investors were said to have been comfortable with that. The assumptions also included a 5% stock borrow cost and a full dividend pass-through. This gave a bond floor of 91.5% and an implied volatility of about 33% for the CB. Because of the lower resent floor, the volatility on the bonds-with-warrants was slightly lower. Historic volatility has spiked up recently and is currently above 70%.

Taihan, which has a market capitalisation of about $3.4 billion, said it will use the proceeds to repay W250 billion ($273 million) of short-term debt and put the rest towards general corporate purposes.

Goldman Sachs sold the 9.9% stake in Prysmian to Taihan at the same time as it sold Eur430 million worth of shares, equal to a 12% stake, in the same company to money managers. The sale comes after Prysmian's share price has rallied 30% since the company went public through a Milan listing in April. Goldman still owns 32% of the Italian company after the combined sale.
¬ Haymarket Media Limited. All rights reserved.
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