Nanya Tech seals $500m convertible bond

Memory chip maker pulls off one of the biggest convertible bond sales in Taiwanese history, reaping $500 million in Asia ex-Japan's first international convertible of 2017.

Taiwanese memory chip maker Nanya Technology completed the first internationally-marketed convertible bond offering of the year in Asia ex-Japan on Tuesday, raising $500 million from a US-dollar denominated note to finance its expansion plans.

Nanya Tech’s decision to launch the deal on Tuesday helped it ride on the strong momentum of a convertible note sale by another Taiwanese tech company, Ennoconn, on Monday. Ennoconn’s $200 million Reg S deal, mostly locally distributed, traded exceptionally well and was indicated over four points higher in the secondary market on Tuesday.

In addition, Nanya Tech managed to take advantage of a decent rally in its stock since late November on the back of the firm’s NT$31.5 billion ($1 billion) investment in US chip-making giant Micron Technology. That investment alone will add an estimated NT$19 billion to Nanya Tech’s NT$36.5 billion net profit in the first nine months of 2016.

The stock rally was also supported by a global shortage of dynamic random access memory (DRAM) chips, which caused prices to surge as much as 30% in the last three months of 2016. Market research firm DRAMeXchange estimates prices could go up another 30% in the first quarter of this year.

All these factors helped Nanya Tech overcome a number of difficulties, not least the fact it is an unrated issuer, and the relatively large deal size by Taiwan standards. In fact, the convertible bond sale is the largest of its kind since United Microelectronics Corp (UMC) issued a $600 million bond in May 2015.

The deal is also the fourth largest convertible bond issue in Taiwanese history after Hon Hai’s $1 billion bond, and AU Optronics' $800 million issue and UMC's deal.

Another unhelpful fact was that Nanya Tech itself is a high-dividend stock: its 5.9% implied dividend yield is 200 basis points higher than the average for Taiwanese stocks.


Nanya Tech’s zero-coupon, Reg S-only deal was launched with a yield-to-maturity of 1.5% to 2%. It had a standard five-year, three-year put structure and was pitched with a conversion premium of 10% to 15% over the stock’s NT$47.7 Tuesday close. There was also full dividend pass-through for all bond holders.

Some bond traders considered the conversion premium fairly conservative given Nanya Tech is still underperforming some of its DRAM-making peers such as Micron and SK Hynix.

There was a lack of stock borrow in the secondary market, but the lead banks were able to compensate by providing asset swaps at 275bp over US Treasuries for the entire deal.

In the end, the issuer managed to draw overwhelming demand of as much as $2 billion from about 140 accounts, according to a source familiar with the situation.

Final pricing was settled towards the investor-friendly end, with a 1.75% yield and a 10% conversion premium. The bond’s strike price was fixed at NT$52.47; relatively low compared to the stock’s all-time high of NT$85.22.

Indicative demand was slightly stronger from hedge funds over outright accounts and proprietary desks, but allocation was skewed towards outright accounts and wall-crossed investors. The top five accounts took up about 40% of the deal, according to the source.

About 60% of the deal ended up in the hands of Asian investors, which is not surprising given the lack of research coverage from international banks, and the fact Nanya Tech is little-known outside the region.

European investors accounted for 35% while US investors took only 5%, largely due to the fact the Reg S deal cannot be sold to onshore US investors.

Underlying assumptions of the deal include a 92.3% bond floor, an implied volatility of 20.2% and a theoretical value of 105.9%. That is based on a credit spread of 275bp and a theoretical 5% borrow cost.

Nanya Tech’s new bond was indicated at a bid/ask of 102.5%/102.55% early Wednesday in the secondary market.

The company said proceeds from the bond sale will be used to expand its capacity of developing 20-nanometer DRAM chips.

UBS was the sole global coordinator of Nanya Tech’s bond sale. DBS and Yuanta Securities were joint bookrunners.

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