A little more than two weeks after Wistron Corp beat it to become the first Asian company to issue a convertible bond this year, Taiwan’s Pegatron Corp finally hit the market yesterday. And it appears the wait was worth it.
The company’s share price gained 5.6% yesterday to an 11-month high as the Taiwan market was playing catch-up with other markets after being closed for more than a week and Pegatron itself benefitted from Apple’s strong fourth quarter earnings that was released last week. Pegatron, which designs and manufactures desktops, laptops, smartphones, games consoles and LCD TVs for Apple and others, captured this window perfectly.
The zero-coupon CB was launched at a base size of $250 million, but good demand and attractive terms allowed it to exercise the $50 million upsize option at pricing, resulting in a total deal size of $300 million. The terms were fixed at the best end for investors, but if size was the main object, then Pegatron did achieve its target in a significantly smoother way than Wistron.
Its larger competitor — Wistron and Pegatron are in the same industry — is currently in the process of trying to exercise a $100 million upsize option that could increase the size of its CB to $280 million. The company initially raised $180 million after exercising part of a $50 million upsize option on the day of the deal. The base deal amounted to $150 million.
Wistron did achieve a slightly higher premium, although one source noted that Pegatron was always more focused on a specific conversion price and hence was willing to accept a slightly lower premium as its share price edged higher. Pegatron has gained 3.7% since Wistron’s offering on January 11 and is up 14.1% so far this year.
The five-put-three CB was offered with a yield-to-put between 1% and 1.5% and a conversion premium of 12% to 15% over yesterday’s close of NT$37.60. As noted, both were fixed at the investor-friendly end — perhaps not too surprising given yesterday’s sharp gains in the share price — resulting in a 1.5% yield, a 12% premium and an initial conversion price of NT$42.11. There is an issuer call after three years, subject to a 125% hurdle.
Wistron’s three-year CB also came with a zero percent coupon and was priced with a 1.5% yield-to-maturity and a 20% premium. The bond is currently trading at about 101.5 to 101.75, according to market sources, and the share price has also edged higher, which means that as of yesterday’s close the premium on the CB had dropped to about 13.5%.
Pegatron was trading around par in the gray market last night, which suggests that while the 12% premium clearly looked attractive, investors didn’t view the pricing as too cheap. That said, the base offering was about three times covered even though the order books were open for less than two hours in the early Hong Kong evening.
The fact that Pegatron exercised its entire upsize option in one go and doesn’t have a greenshoe seemed to please hedge funds in particular since it means they know exactly what they are buying. By comparison, Wistron’s large greenshoe created uncertainty about the final deal size and some concern about the availability of asset swaps to cover a bigger deal, which, according to market participants, weighed on the performance of the CB in the secondary market.
The bookrunners offered $200 million of asset swaps at a spread of Libor plus 300bp for the Pegatron CB, which was enough to cover 80% of the base deal, but the expectation was that there would be another $40 million to $50 million of swaps available in the market. However, with the low premium, it becomes slightly less urgent for the CB holders to hedge the credit.
Or as one CB specialist put it: “With the Apple momentum behind it, if the situation in Europe improves, investors may be able to convert this in three months.”
About $150 million of the swaps were taken up immediately. The low premium also reduces the need for stock borrow to hedge the equity option, which is helpful since Pegatron isn’t that liquid a stock. Some investors were said to have been able to get some stock borrow in the market, but only at a price of 5%. One analyst report even used a 6% stock borrow cost when modeling the deal.
As for other inputs, the bondholders will be compensated in full for all dividends. At the final terms, this gave a bond floor of 93.6% and an implied volatility of about 20%, or close to 22% if assuming a 3% stock skid. This compares with a 30-day historic vol of about 35%.
About 60% to 65% of the deal was bought by hedge funds, while the remainder was allocated to outright investors, one source said. Almost 90 investors participated in the transaction.
The CB was brought to market by Citi and DBS. Nomura, which up until just before Chinese New Year was also a joint bookrunner, was no longer on the ticket and as of last night it was unclear why. According to sources the issuer had decided to have Citi and Nomura compete against each other at the last minute, perhaps to get a better price, but there were also suggestions that the final selection wasn’t based solely on price. DBS was brought into the deal primarily because of its ability to provide asset swaps.