Panva launches as Taishin closes CB

Strong oversubscription reveals pent-up demand for convertible sector.

Taishin Financial Holdings launched and closed the first equity-linked issue by a Taiwanese financial institution in nearly nine months yesterday (Thursday). Led by Salomon Smith Barney, books for a $180 million deal closed eight-and-a-half times covered after a five-hour marketing period, which clearly demonstrated how clearly investor appetite for financial holding company CBs has improved since a string of issues saturated the market last summer.

The deal, which had an original filing for $250 million, had been expected all week and when it finally came attracted a total of 168 accounts, with a split of about 40% credit demand, 60% outright accounts. Pricing came at the tight end of indicative terms and comprised a zero coupon deal with a 24% premium to a spot close of NT$17.20. The marketed range was 21% to 24%.

With a five-year final maturity, the deal has a premium redemption structure, with the redemption price coming in at 112.69% compared to a 112.68% to 114.34% indicative range. There is a three-year call subject to a 130% trigger and three-year put at 107.42% to yield 2.4%. This compares to a 2.4% to 2.7% range, which observers say had been narrowed from an earlier indicative range of 2.5% to 3%.

And observers add that while there is also a re-set in years three and four subject to an 80% floor, it is at the discretion of the company and the actual premium is, therefore, still relatively high. Year-to-date, the stock is down 3.37%, though it has been relatively flat since the beginning of February.

Based on terms at pricing, underlying assumptions for the Baa3 rated deal include a bond floor of 95%, implied volatility of 23.1% and theoretical value of 103.4%. This is based on a credit spread of 170bp over Libor, zero dividend yield, zero stock borrow and volatility assumption of 30%.

The nearest comparable is Sinopac's $200 million convertible, which was the last of the financial holding company CBs to come to market in July 2002 via UBS Warburg. It also has the same Baa3 rating as Taishin. At pricing, the deal came with a 21% conversion premium, redemption price of 114.11% and three-year put at 102% to yield 4.45%.

This equated to a bond floor of 96.5%, implied volatility of 18.5% and credit spread of 180bp over libor based on zero dividend, zero stock borrow and 30% volatility assumption.

Comparing the two, one convertible expert says, "The financial holdings company deals of 2002 had more defensive bond floors and higher yields. They struggled to achieve conversion premiums over 20% and were increasingly difficult to place.

"This deal is well priced," he adds. "The premium is a little high, but the bond floor is about right and it gives investors an attractive three-year option."

The combination of excess liquidity swilling around the Taiwanese banking sector, increasing redemptions in the dollar convertible market and little new supply, meant that Taishin was able to come only 5bp wider than Sinopac on a current asset swap basis and immediately traded up to 101%/102% in the grey market.

Bankers say the deal prompted a "feeding frenzy" from investors and even attracted long equity funds, which jumped on the back of the momentum, which pushed it to strong oversubscription.

What the deal did lack, however, were fees. At 1% all-in, Taishin ranks as one of the lowest ever from Taiwan and many feel it has set another unattractive precedent.

In the meantime, Morgan Stanley has also launched a $50 million convertible for Hong Kong's Panva Gas. The deal will price later today and is believed to the first convertible from the GEM market. Hutchison Whampoa owns about 5% of the BB+ rated credit and group managing director Canning Fok also sits on its board. The company supplies liquefied petroleum gas to China.

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