Siliconware gets desired CB pricing

After a slight pricing delay, the Taiwanese IC packager benefits from a rising stock market.

Lead manager Morgan Stanley has successfully closed a $175 million issue for Siliconware Precision Industries after holding books open over the weekend and pricing in New York late on Monday night.

According to the lead, the deal was not priced as initially anticipated on Friday afternoon Asian time because of an execution issue. According to the market, this related to a 7% drop in the company's share price on Friday, which closed limit down.

Having opened books at New York's open the previous night, this left the company and lead manager with the dilemma of whether to price off Thursday's higher NT$27.9 close or Friday's lower NT$26.8 close. For the company, it would have been particularly important to price off the former, as its share price had been consistently falling all week from a year-to-date high of NT$34.4 on January 9.

In the end, however, the Taiwanese market experienced its biggest surge in over a month on Monday, bringing Siliconware up to NT$28.6, higher than both Friday and Thursday's closes. Over the intervening period terms were also revised slightly to compensate the company for its falling share price, with the indicative range for the conversion premium adjusted from between 10% and 15% to 15% and 17.5%.

Final terms comprised a five-year final maturity with a zero coupon and 15% conversion premium to a spot price of NT$28.6. There is a call option after two-and-a-half-years subject to a 130% hurdle and a put option also after two-and-a-half years giving a yield-to-maturity of 2.25%. Premium redemption is at 111.8%. The yield was priced at the tight end of a 2.25% to 2.75% indicative range.

There is also a $25 million greenshoe. Alongside the lead, there were five co-managers comprising ABN AMRO, Daiwa, ING Barings, KGI Securities and Lehman Brothers.

These terms value the bond floor at 89% with theoretical value at 103% based on implied volatility of 30%. This reflects a credit spread of 325bp over Libor, historic volatility of 50%, a zero cash dividend yield and stock borrow cost of 2.5%.

Most convertible experts conclude that the revised terms were fair, although some argue that the deal appeared a little cheap. "We think historic volatility should be more like 70% and implied volatility 40%," says one. "This brings the theoretical value up to 107%."

On Friday, the deal had traded as high as 103% bid in the grey market before closing at 101% when the deal priced on Monday some 13 times oversubscribed.

Bankers say that investors liked the balanced characteristics of the deal, which would have conversely had little appeal to hedge funds since Siliconware's ADR only trades about $1 million a day and is difficult to hedge. Since the company is also not considered investment grade, there was some, but not major participation, by fixed income accounts. Consequently, about 60% of the deal was placed with outright buyers.

A total of 225 investors were reported, with a split that saw 55% of paper placed in Europe, 30% in Asia and 15% in the US.

Despite the pre-pricing blip, commentators believe that Siliconware has started the year on a positive note for the Taiwanese equity-linked sector and set a benchmark that others will find harder to emulate once the market starts trying to absorb deals in force.

Its terms also show that Taiwanese issues are likely to start pushing for duration resulting in lower bond floors, after previously relying on short-dated puttable structures.

"Issuers have now become more wary of re-financing risk and investors are not quite so risk averse as they were so maturities will get longer," one banker notes. "Funds are also starting to look for yield. Many now realise that while they got downside protection from the annual puttable structures, they also made zero money on their investment."

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