A $225 million convertible by Taiwan's largest LCD monitor manufacturer has given other issuers in the pipeline mixed signals about the state of the Asian equity-linked market. Traditionally issuers at the head of the pipeline have been able to benefit from the most aggressive terms because the market is still fresh. In this instance, however, Lite-On Technology only just managed to get a deal done yesterday (Wednesday), suggesting that investor appetite for Asia is lukewarm at best.
Originally, Morgan Stanley and UBS were mandated for the deal after outbidding house bank Citigroup in late June. But having failed to execute a deal over the summer and again after soft marketing a transaction earlier this week, the two saw the deal pass back to Citigroup, which turned it around in a day.
The latter has long been regarded as Lite-On's house bank, having undertaken the four-way merger of Lite-On Tech, Lite-On Electronics, GVC and Silitek in 2002. It also says it managed to complete the deal without warehousing any paper on its own books.
The original filing comprised a $315 million transaction, which has resulted in a $225 million issue size with a $50 million shoe. Terms comprise an issue and redemption price of par, zero coupon and zero yield.
There is a two-year call subject to a 120% premium, a two-year put and a re-set after year one. The conversion premium was the only marketed part of the deal and was priced at 23% to the stock's NT$32 close compared to a range of 23% to 26%.
By contrast, observers say MS and UBS had originally been pre-marketing a deal with a sub 20% conversion premium.
Underlying assumptions comprise a bond floor of 91.9%, implied volatility of 29.4% (29.4% to 31% marketed) and theoretical value of 101.8% (100.9% to 101.8% marketed). This is based on a credit spread of 150bp over Libor, 5% borrow cost, full dividend protection and volatility assumption of 33%.
The dividend protection is important since Lite-On is one of the few Taiwan tech stocks that pays a high dividend. It is currently yielding 4.7% and has just paid out a dividend of 10% of which NT$1.4 was in cash and NT$1 in stock. The stock went ex-dividend on Monday.
Citigroup is also said to have been more aggressive on the credit spread arguing that Lite-On is an implied BBB- rated credit. It believes its valuation was vindicated by the fact its credit bid did not get hit at this level. Accounts are said to have decided against stripping the deal in the primary market on the basis of prospective credit tightening.
This is based on the fact that BBB Compal is currently bid at 80bp to 90bp, some 60bp tighter when 20bp to 30bp would be more normal for a one-notch differential between credits in the same sector. Lite-On also has a comfortable cash position and is lightly geared, with a 2004 estimated net debt to equity ratio of just 14%.
The order book is said to have been just covered, with participation by 55 accounts, a relatively low number for a relatively large Taiwan tech CB. At $3.5 million, the average order size was also quite small, with bankers reporting just 10 orders above the $8 million mark.
By geography, 70% of investors were from Asia and 30% from Europe, again suggesting that international CB investors remain sitting on the sidelines after being burnt earlier this year. However, for investors that want to put cash to work, the Taiwan CB market has generally been the best performer of the year.
Of the 18 $100 million plus Taiwanese deals issued so far this year, half are trading above par. By contrast, all but one of the 16 deals from India and Hong Kong are trading below par, with the former still averaging secondary market levels well down in the 80 cents range.
Investors that did participate in Lite-On's deal are said to have liked it because both the equity and credit have some momentum. Year-to-date, the stock is down 2.22%. However, since mid-August it has risen by about 18% and been buoyed by strong first half results.
Net profit was up 19% to NT$3.7 billion ($109 million) compared to the same time last year. This has been attributed to a 71% jump in sales over the same period and improved cost controls. For example, operating expenses as a percentage of sales declined from 6.45% in the first quarter to 5.97% in the second.
The stock is currently trading on a 2004 P/E ratio of nine times and on full conversion the convertible will represent roughly 10% of Lite-On's market cap.
The company holds the distinction of being the first electronics manufacturer to list on the Taiwan Stock Exchange and recently celebrated its 30th anniversary. It also just overtaken BenQ as the country's largest LCD monitor manufacturer.
