SIS completes CB

A weak tech sector fails to deter the Taiwanese chipset manufacturer.

ING Barings completed a slightly scaled down $80 million transaction for Silicon Integrated Systems (SIS) yesterday (Thursday) after offering a deal with high equity sensitivity. Marking the company's debut in the international capital markets, the deal's low conversion premium and multiple re-sets were designed to appeal to investors who believe the tech sector will turnaround at some point later this year.

The deal follows the cancellation of a prospective ADR via Bear Stearns and stands out from recent Taiwanese deals because it is smaller, from a different sector and has a much lower bond floor. High theoretical value, however, makes the equity option cheap on an absolute basis.

Like Chinatrust and Sinopac before it, SIS also made a strategic decision to clear an exceptionally difficult market and maximise proceeds by scaling back the initial offering size ($100 million to $80 million), while incorporating a larger greenshoe, to be exercised if secondary market trading remains stable.

Terms comprise a five-year maturity with a zero coupon and an 8.2% conversion premium to a spot close of NT$30.5 There is also a call option after one-and-a-half-years subject to a 125% hurdle and a two-year put at 107.545% to yield 3.7% or 100bp over Treasuries. Premium redemption falls at 119.944%. The shoe is $20 million.

In addition to the conversion premium, which marks the lowest of the year, there are annual re-sets subject to an 85% floor. Like China Development Financial Holdings before it, the company also has a discretionary re-set for a 30-day period ahead of the put option and maturity, which should further encourage conversion.

Underlying assumptions comprise a bond floor of 94.4%, implied volatility of 13.5% and theoretical value of 111%. These are based on a credit spread assumption of 350bp over Libor, 0% dividend yield, 5% stock borrow cost and 35% volatility assumption.

Alongside Barings, Bear Stearns and Yuanta Securities were co-leads.

Because the tech sector has been on a steep downward trajectory in recent months, there has only been one deal from the sector since March (UMC) when the continuous string of Taiwanese tech deals ground to a halt after the completion of a $100 million convertible for Elitegroup Computer via UBS Warburg.

Motherboard manufacturer Elitegroup accounted for 60% of SIS's revenue in 2001 and is also the most relevant pricing comparable for the new deal. With a similar BB implied rating, Elitegroup priced a five-year deal with a zero coupon and 15% conversion premium to spot in the middle of the month. The deal also had a 23-month put option at 109.5% to yield 4.8%.

In the interim period, Treasury yields have come down sharply to the benefit of SIS, which has been able to price through 4%. Since the beginning of July, for example, two-year treasuries have moved from 2.85% to 2.6%.

SIS has also been marketed on a slightly tighter indicative credit spread than Elitegroup, which was priced at 375bp over.

From the company's perspective, it is likely to have gratifying that while it may have had to price a deal for investors, there has at least been a bounce in its share price following the marketing of the equity story. At NT$30.1, the stock is down 47.65% on the year, but has outperformed the Taiwan market by 5% since the release of research on July 1.

This aimed to promote SIS by concentrating on potential market share gains rather PC demand, which has been weak since the end of the first quarter. SIS is the world's third largest chipset manufacturing after Intel and VIA, which have respective market shares of 55% and 30% to 35% compared to15% for SIS. According to the research, SIS should increase market share from 12.5% at the end of 2001 to 21% by the end of 2003.

This is likely to arise from the higher efficiency and more profitable product mixes afforded by its 8-inch fab which came on stream last year. Unlike VIA, SIS has now moved from being a pure design house to an IDM model and unlike its competitor, which is still in litigation with Intel, SIS also ranks as one of only two Taiwanese companies to be licensed to make the Pentium 4 chipset.

Books for the deal closed two times oversubscribed with a total of 40 accounts. Geographically the book split 50% Europe, 25% US and 25% Asia. Launch took place in an extremely difficult market, but by the end of the first day's trading the pricing level appeared to have been vindicated with secondary trading around the par to par-and-a-quarter level.

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