DRAM manufacturer Nan Ya Technology rode on the back of the tremendous liquidity pouring into the Taiwan market yesterday (Wednesday) with the pricing of a $200 million convertible. Having risen 8.5% in the two trading days since Chinese New Year alone, the stock is now up 19.7% on the year. This sudden upswing follows a protracted decline over the second half of 2003, when Nan Ya fell from its July peaks around the NT$30 level to the NT$19 mark in December.
Timing has therefore taken advantage of a new bull run propelling the Taiwan tech sector and the deal has consequently been able to secure aggressive terms.With ABN AMRO and Citigroup as lead managers, the deal has a five put two structure.
The issue was priced at par with a zero coupon, zero yield and redemption at par. The conversion premium was priced at 38% over the stock's NT$25.5 close and there is a call option in year two with a 130% hurdle. There is also a $20 million greenshoe.
Underlying assumptions show a bond floor of 92.5%, implied volatility of 37% and theoretical value of 99.50%. This is based on a credit spread of 200bp over Libor, zero divided, 5% borrow assumption and 100 day volatility of 32%.
Observers report that the credit was variously being bid in a range of 170bp to 230bp over Libor and that some accounts were using a 3% borrow assumption, although borrow is said to be hard to come by despite the existence of a liquid GDR.
Using a more aggressive credit spread assumption and borrow cost makes the deal appear even more finely priced and brings theoretical value out at 97.50%. However, observers say that since it is very hard to extract the volatility, most accounts viewed the deal as a straightforward play on an upswing in the tech sector.
This was further bolstered by the market's underlying liquidity, with books closing around the $2 billion mark within an hour-and-a-half of launch. Bankers also note greater participation than normal by Asian accounts, particularly those from Taiwan looking for ways to play the market and less demand from hedge funds.
With about 30% of the deal thought to have been asset-swapped immediately, the book shows a rough breakdown of about 50% Europe, 40% Asia and 10% US.
Nan Ya is currently trading towards the bottom of its historical cycle on a 2004 price to book valuation of about 1.6 times. Contract chip prices have fallen 30% over the past three months, but analysts believe the cycle has now turned following a 2% increase over the second half of January. In a research report published this week, for example, UBS said that, "with PC OEM's increasing DRAM content as DRAM falls below 4% of PC cost, this suggests to us that DRAM prices are likely to bottom in 1Q04."