Neo Solar returns with $120m convertible

Taiwan-listed solar company plans to roll over its existing debt by issuing a new, credit-enhanced convertible bond.

Taiwanese solar cell manufacturer Neo Solar Power made its return to the international equity-linked market in slightly over two years, bringing a $120 million deal on Tuesday that received stronger demand compared to the last issue.

The structure of the new Reg S-only deal was largely similar to the company’s outstanding $120 million zero-coupon bond due 2017. Both deals have a maturity of three years, came with no coupon, and were launched with a standby letter of credit by ING Bank, which is rated A by Standard & Poor’s and A1 by Moody’s.

But the issuer managed to fine-tune the structure to make the new deal more appealing to international investors. This time, the deal is denominated and settled in US dollars, a structure that enables convertible bond funds with US dollar-only mandate to participate. The last deal issued in 2014 was denominated in New Taiwan dollars.

As a result demand for the new deal was multiple times more than the deal size with over 40 accounts getting allocation, according to a source familiar with the transaction. That was about double the number in the 2017 deal, which was allocated to around 20 accounts. About 40% of the allocation went to European accounts, showing that the new structure helped attract non-Asian investors.

The source said there was price sensitivity during the bookbuild, during which the bonds were offered at a yield-to-maturity of 0.5% to 0.9877% and an initial conversion premium of 5% to 15% against Neo Solar’s NT$16.3 Tuesday close.

Eventually pricing was settled around the mid-point, with a 0.75% yield and a 10.4% conversion premium, translating to a final conversion price at NT$18.

Similar to the 2017 deal, the new bond mainly appealed to outright investors because there was almost no stock borrow available for the small-cap company, according to a bond trader. In addition, the plunge of Neo Solar’s share price – from NT$35 when the last deal was done to NT$16.3 on Tuesday – means outright investors are betting on the recovery of the stock in the future.

Analysts expect solar cell manufacturers to outperform in the near future amid a rebound in prices of solar cells, lower inventory levels as well as increased orders from India, where there is a stronger demand for alternative energies.

However, the credit portion of the bond was equally attractive to some investors, particularly when ING Bank’s credit rating from Moody’s is one notch higher compared to two years ago. The new bond also offers a 0.75% yield compared to double zero – zero coupon and yield – for the existing bond.

As a result, the new deal has a fairly high bond floor at 95% assuming a credit spread of 120 basis points and a 5% stock borrow cost. Implied volatility is around 20%, which is slightly wider than the previous issue.

Proceeds for the new issue will be used to repurchase the existing bond, which is due in less than a year. From the company’s perspective, issuing a new bond allows it to retain most of its $333 million cash holdings for capital expenditure.

While for existing bondholders, the new bond offers them an opportunity to convert into shares since the high conversion price means the old bond is highly unlikely to be converted.

About 86% of the eligible bondholders voted in favour of the bond repurchase in a bondholder meeting in September 5.

Neo Solar’s new 2019 bond traded up about 1.5 points in secondary market trading on Wednesday.

Daiwa Capital Markets is the sole bookrunner of the transaction.

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