Quanta back in CB market

Taiwan''s largest notebook manufacturer shows CB market what it is capable of.

Quanta Computer returned to the CB market for the first time in two years on Tuesday (July 19) with a $200 million convertible via Citigroup. The BBB- rated credit was just the kind of high quality name the market needed to revive investor confidence.

So far this year there have only been six equity-linked transactions from Taiwan and they have all been from companies at the other end of the credit spectrum. However, the recent combination of sharply rising share prices and buoyant debt markets seems likely to encourage a large number of companies that have been sitting on the sidelines for months.

In turn bankers note renewed enthusiasm from the hedge fund community with Quanta's books closing six times covered after a two-and-a-half hour bookbuild.

The company issued a five-year deal with a put and call option after 20 months. The deal was priced at par, has a put option at par and redeems at par.

The conversion premium was marketed between 10% and 15% and priced at 14. 75% to the stock's NT$63.7 close on Tuesday. It is callable after 20 months subject to a 125% hurdle.

Underlying assumptions comprise a bond floor of 91.9% and implied volatility of 26.9%. This is based on a credit spread of 80bp over Libor, 5% borrow cost, zero dividend (there is full protection) and a volatility assumption of 29%.

Two of the more striking aspects of the transaction are the low bond floor and implied volatility. The cost of the option - eight points - is high relative to the short duration - 20 months.

So too, the implied volatility is higher than it would have been only a few months ago when transactions struggled to price outside the teens.

Nevertheless, terms are nowhere near the levels Quanta was able to achieve in 2003 during a bull market for CBs when US Treasuries were at historic lows and volatility levels at much higher levels. At this point the group managed to secure a yield-to-put of -5% (puttable after 22 months) and a high conversion premium of 32%. So too, the deal was modelled on a volatility assumption of 43% to give an implied of 36%.

This June 2008 transaction is currently trading around 96% bid on a conversion premium of 13% , implied of 22.75% and a bond floor of 94%. Its predecessor, due February 2006 is currently bid about 106% on a conversion premium of 3.9%, implied of 25.7% and bond floor around 97%.

About 130 accounts participated in the new trade, a significant increase over ProMOS, which bought the last benchmark tech deal from Taiwan in mid June and secured 60 accounts. By geography, the book split 48% Europe, 33% Asia and 19% US.

Says one specialist, "Everyone's been asking themselves when volatility levels are going to start rising again and perhaps this deal provides a good leading indicator."

The company's share price has also been on a tear having risen from a low of NT$47.2 in late January and again in late April to a 52 week high of NT$64 on the day the CB was priced.

Yesterday (Wednesday) the stock fell to NT$62.50, while the CB closed the day marginally up at 100.50% to 101%. At its current trading levels the group is valued around 2.7 times forward book.