Shin Kong FHC broke what feels like an almost year-long drought of equity-linked issuance from Taiwan yesterday (December 8). Under the lead management of house bank Morgan Stanley, the group raised $220 million from a five-year transaction with a two-year put option. There is also a $30 million greenshoe.
The deal represents just the second FIG deal from Taiwan this year following a $90 million issue for Fuhwa in January and the first CB from the country since a $381 million issue for UMC in late September. Year-to-date, there have been just eight $100 million plus issues from the Taiwan raising a total of $1.6 billion.
Terms for Shin Kong's deal encompass a zero coupon structure with an issue and redemption price of par. The deal was marketed with a conversion premium of 10% to 15% and priced at 11% to the stock's NT$25 close on Thursday. There is also a three-year call option with a 120% hurdle.
Underlying assumptions comprise a bond floor of 89.5%, implied volatility of 26.3% and theoretical value of 101.9%. This is based on a credit spread of 70bp, full dividend pass through, 5% borrow cost and 100 day volatility of 30%.
Shin Kong has a BBB- rating from Fitch. Non syndicate bankers considered the terms fair, although one thought the credit spread on the tight side.
A zero coupon structure is also fairly aggressive considering the upward trend of interest rates during 2005, although this was balanced by a fairly low conversion premium.
The stock had also dropped 5.6% on the day in the line with the FIG sector. Most Taiwanese bank stocks traded almost limit down after the government announced plans to cap interest charged on credit cards at 10%.
However, Shin Kong opted to proceed with its deal as its filing will expire at the end of the year and it wanted to take advantage of the high liquidity evident in the CB market over the past two weeks.
The order book is said to have closed three times covered, with participation by about 43 accounts, a large number of which already own an outstanding Shin Kong CB. This June 2009 deal is currently bid below par at 99.125% on a conversion premium of 28.8%.
Specialists have seen little evidence of asset swap activity and add that most accounts are comfortable holding the deal on an outright basis in the knowledge that there is a liquid asset swap bid.
At NT$25, Shin Kong is currently valued at about 1.6 times book and 10 times 2006 earnings. In early November, the group announced plans to purchase 80% to 100% of SK Investment Trust for NT$1.4 billion ($42 million) to NT$1.7 billion ($51 million).
The move is line with FSC requirements that investment trust merge under an FHC structure. It has been designed to restructure the investment trust industry following losses on structured bond holdings. As a result of the deal, which was completed at 2.2% of AUM, the AUM of Shin Kong's combined operation will rise from NT$6 billion to NT$84 billion.
