Deutsche Bank closed the books on a $160 million convertible for Ritek Corp after only two hours yesterday (Tuesday), taking advantage of momentum generated by its previous day's deal for Powerchip to propel the new offering along. The market's strong tone was evidenced by an order book, which closed ten times oversubscribed, with orders capped and pricing completed at the tight end of indicative terms.
These comprised an issue price of par to 101% and a conversion premium of 8% to 13%. Because of the deal's short duration, final terms meant the borrower was able to get away with a negative yield structure.
With pricing at 101%, the five-year deal has a zero coupon, par redemption structure, with put options in years one and two at par to give a negative yield of 1%. The conversion premium was set at 10% to the stock's NT$23 close and there is a call option in year one subject to a 120% hurdle. There is also a $30 million greenshoe.
In an unusual twist, the transaction incorporates two make whole call options after six and 12 months. These can only be exercised if the stock is above NT$20 and at a cost of 2%. Observers say they were included because Ritek is keen to ensure conversion and while such provisions remain a novelty in Asia, they are standard practice in the US.
Underlying assumptions comprise a bond floor of roughly 95%, theoretical value of 103% to 104% and implied volatility of 27%. This is based on a credit spread of 400bp over Libor, 500bp borrow cost and historic volatility in the mid 40% range.
One of the main reasons why Ritek opted for an equity-like structure is the existence of a $175 million convertible, trading on a relatively high conversion premium. The CSFB led deal was priced in January last year at a 12.2% premium to an NT$40.40 close and is currently trading at a 38.9% premium.
A second reason is that Ritek is a credit, which never typically attracts a lot of asset swap demand. Its outstanding convertible would also still be filling credit lines. And observers say there was limited asset swap demand for the current offering, which attracted just north of 100 investors.
"This is a momentum driven play," says one. "A lot of money is flowing back into Asian stocks and tech is still attracting a lot of attention."