Samsung Electronics brings surprise CB

A secondary market convertible by the DRAM giant has been re-packaged for the public markets, in a bid to take advantage of high-implied volatility.
With Morgan Stanley Dean Witter again acting as lead manager, a privately placed convertible issued as part of a supply contract has returned to the public markets after the expiration of a one-year lock-up. The only difference is that while last November's $200 million transaction came from Dell, this March's $100 million deal (on a nominal basis) has come from Apple.

With all terms fixed at the original launch, the lead's only manoeuvrability has derived from the prospective issue price, which was marketed under a 117% to 119.3% range and priced at the very top. At this level, it came above the deal's 109.432% redemption price, giving the issue a negative yield to maturity of 3.7%.

Terms comprise a final issue size of $119.3 million and a 30 July 2002 maturity. There is a coupon of 2 % coupon and a conversion price of $90.9148, equating to a 24.1% premium to Tuesday's GDR close at $87.

The high desirability of the Samsung name, in tandem with the small issue size, meant that demand was heavy and the order closed with an hour-and-a-half of launch in London. At the eight times covered level, bankers say that about 100 accounts participated, of which about 80% were European and the balance American.

Given that the deal was pitched as an implied volatility play, there was not surprisingly heavy demand from hedge funds, although there was said to be little follow-through impact on the GDR price. Outright buyers were also said to have been represented.

For most investors, the attraction of the deal was the pick-up it offered to Samsung's outstanding January 2003 transaction sold by Dell and which has been trading at an implied volatility of about 59%. During the marketing process, this level was said to have fallen about 3%, with trading at 55.6% at Asia's close yesterday (Tuesday).

By contrast, the new deal was priced on an implied volatility of 50%, based on historic (100-day) volatility of 77% for the GDRs and 69% for the company's domestic shares, which the deal can also be converted into. Bankers say that this gives the deal a fair value of about 121% of par, or 101.3% against the new issue price. Within a day of launch, the deal was still trading around issue price at 118.63%-119.13%.  

In total, there are 14 points of option value based on a bond floor is 86.8. This equates to an implied credit spread of 200bp over Libor, although bankers say that the debt spread makes little difference to the overall valuation in this particular instance.

"Investors liked the deal because Samsung is one of Asia's top technology companies and it's investment grade rated," says one. "The high credit and the high volatility were a winning combination. We were also helped by the fact that the existing deal has performed so well and that the underlying equity-linked market is still very buoyant."

The Dell transaction was re-priced in early November at 101.65% based on a coupon of 2%, a 34.85% premium to the then GDS price of $80.125 and a yield to maturity of 5.72%, equating to roughly 30bp through Treasuries. Due January 2003, the deal is non-callable for life and has a redemption price of 110.449%. Underlying assumptions were a bond floor of 95 and an implied volatility of 30% to give a much lower option value of 6.65 points.

The deal is currently trading on a conversion premium of 46.6%, a negative yield to maturity of 0.895%, a bond floor of 100.85 and a bid/offer price of 114 - 116.