Ritek, the world's largestáCD-R manufacturer (Compact Disc Recordable)áinitially prepared to launcháa $300 million deal (including greenshoe) at the beginning of April, butápulledáback after Cable & Wireless suddenly dumped itsáPCCWástake onto theámarket via a $1.5 billion exchangeable. The company returned on Wednesday with a reduced issue size of $160 million and priced the deal yesterday (Thursday) just before Taiwan's open.
A strategy of using a smaller issue asáa foundation to build momentum paid off, as joint bookrunners Salomon Smith Barney and JPMorgan were able to increase the final amount to $210 million on books which closed three times oversubscribed. There is also a $30 million greenshoe.
Bankers admit that the deal was a hard slog in the face of considerable investor indifference, but conclude that there is still a Taiwanese bid for those that can dig deep enough. With a 115 strong order book of investors, allocations were split 50% Europe, 30% US and 20% Asia.
Final pricing came at the wide end of terms and comprises an issue and redemption price of par, zero coupon, 13% premium to a spot price of NT$80 (Wednesday's close) and hard no call for two years and then at accreted value to year three and thereafter subject to a 130% trigger. There is also downward adjustment in years one-and-a-half and two-and-a-half subject to an 80% floor. The deal is convertible into either shares or GDR's.
With a five year final maturity, the deal has put options in years two and three at respectively 112.05% and 118.61%. These equate to Treasury spreads of 157bp over and 138bp over and compare to a final indicative range at 111% to 112% and 116.6% and 118.3%.
Fees total 2.5%, with ABN AMRO credited as joint lead and Chinatrust Securities as co-manager.
Credit assumptionsáinclude a spread of 350bp over Libor, a bond floor of 95.125% and yield-to-put of 5.854%.
The nearest comparables are recentátwoáyear puttable deals by Acer Communications & Multimedia (led byáSalomon), Yageo Corp (also led by Salomon) andáProMOS Technology (Deutsche). Each transactionáunderlines a growing desire forágreaterácredit protection by investors, with Acerácoming firstáat 90bp through Treasuries, Yageo at 15bp over Treasuries, ProMos at 100bp over Treasuries and now Ritek at 157bp over.
Having priced its five put two dealáat the end of March, ProMOS has, for example seen the yield-to-put widen about 75bp from aálaunch yield of 5.22% to 5.813% at Thursday's close of trade in Asia.áAs the Taiwanese stock market has continued to outperform, conversion premiums have also come down from Acer's 25% level, through Yageo's and ProMOS's 15% and 17.5% levels, to Ritek's 13%.
All four dealsáwould also seem to show that Taiwanese borrowers have become more attuned to the re-financing risks attached to annualárolling put structures. In opting for two year puts, they reflect an attempt to lengthen tenor without having to massively widen pricing to continue meeting investors' demands for defensive structures that can be easily exited.
ProMOSátempted investors to hold the deal beyondáits two year put at 110.86% by offeringápremium redemption in year five at 123.99%. Ritek hasáattempted to do the same thing by the jump from 112% to 118% between years two and three.
"If as a Ritek investor you've got to year two, then there's a good chance you'll stay in to year three to get the additional pick-up and so it's a good structure," says one convertible specialist. "With ProMos there'sámore risk staying in till year five, but the reward at the end is conversely greater."
For equity analysts, Ritekástill has plenty of upside potential, despiteáthe fact that the stock has already climbed 68.07% this year.Says Charles Yang of EnTrust Securities in Taipei, "We expect CDR prices to recover quite strongly over the next few months and with a global market share ofáover 50%, Ritek will be one of the main beneficiaries. The company is currently trading on a p/e ratio of about 20 times prospective 2001 earnings, but we expect it return to aá25 timesálevel if the stock hits our target price of NT$106."ááááá