Joint lead managers Deutsche Bank and Morgan Stanley completed a combined convertible and share placement for ST Assembly yesterday (Wednesday), with both transactions upsized from $100 million to $115 million. Neither offering marked a particularly straightforward proposition for the leads, given that the stock has massively outperformed the underlying market so far this year and most analysts believe it is overvalued.
Nevertheless, the placement closed three times covered and the convertible 16 times covered, with the two deals able to successfully feed off each other to the benefit of the overall transaction. Together, they will expand the freefloat from 28% to 38% and on full conversion, the holding of government-linked company Singapore Technologies will fall to 62%. On its own, the placement will dilute existing investors by 8.4% and on full conversion of the convertible by 13%.
The placement comprised a sale of 83.39 million primary shares at HK$2.40 each. This represents a 9.09% discount to the stock's S$2.64 close on Tuesday when it was suspended pending completion of the new deal. The placement was marketed at an indicative discount of 8% to 13% and final pricing is comparable to the recent levels achieved by Taiwanese GDRs also marketed on an accelerated basis. Chunghwa Picture Tubes, for example, recently priced its debut GDR at a 6.7% discount to spot and Quanta Display at an 8.08% discount to spot.
Year-to-date, ST Assembly is up 129.57%, although it is slightly off an S$2.73 high on October 23. The day before pricing, the stock was fairly flat, falling just under 1%.
Observers report a total of 70 accounts in the book, of which about 30% also participated in the CB. By geography, the book had a rough split of 50% Asia, 50% Europe. The CB attracted 110 accounts, with a split which saw 65% placed into Europe, 25% into Asia and the remaining 10% offshore US.
Terms for the CB comprised an issue price of par, zero coupon and five-year maturity. There is a four-year put option at 118.32% and redemption at 123.40% to give a yield of 4.25%. The deal had initially been marketed on a yield of 4.75% to 5.25%.
The conversion premium was set at 27% to the discounted placement price of S$2.40, which equates to a 17.91% premium over the stock's close on Tuesday. There is also three-year hard no call subject to a 130% hurdle and no greenshoe.
Underlying assumptions comprise a bond floor of roughly 85% and implied volatility of 31%. This is based on a credit spread of 500bp over Libor, zero dividend, 1.25% stock borrow cost and 35% volatility assumption.
Observers say the main appeal of the CB was the combination of a reasonable premium and yield, not to mention diversification away from a heavy concentration of Taiwanese tech deals. As one puts it, "Most of the CB's we've seen recently have had one or the other. They've either had high conversion premiums, or aggressive yields. This gives investors a bit of both."
An effective four-year maturity for a tech CB is unusually long by Asian standards and ST Assembly also has a low implied rating of only B+ compared to a mid double-B level for its main comparable, Taiwan's Siliconware Precision Industries (SPIL). On top of this, the Singaporean asset swap market is far more shallow than the Taiwanese, giving investors less comfort about a backstop bid for the credit.
ST Assembly further suffers from the combined effect of an existing CB, which will have eaten up a lot of outstanding credit lines and its ownership by the ST group, which tends to be treated as one amorphous credit mass by local banks. As a result, there was very little asset swap demand in the book and observers estimate that less than 10% was swapped.
For investors that participated, the new deal offers better value than the old, which is currently bid at 107%. This $200 million offering was launched in March 2002 with a 1.75% coupon, 20% conversion premium and three year put to yield 4.19%. However, because the stock has performed badly since then, it is trading further out-of-the-money than the new deal and has a current conversion premium of 33.07% and yield of 4.111%.
And while the bond floor on the new deal looks aggressive, bankers report that the stock does have borrow available. On a like-for-like basis, it is also in line with the valuation of the March 2002 deal, which had a bond floor of 87bp based on a one-year shorter maturity.
Many analysts believe ST Assembly is overvalued at current levels given that it is trading on a 2003 price to book ratio of over four times compared to 1.8 to 2 times for comparables such as SPIL and ASE. Bankers, however, argue that ST Assembly has always traded at a premium to its Taiwanese rivals and has superior credit fundamentals than the sector average. For example, it runs a debt to EBITDA ratio of 3.9 times compared to five times for the overall sector.
On Tuesday, the company released its third quarter results, beating most analysts' expectations and recording its first net profit in 10 consecutive quarters. With third quarter revenue up 55% year-on-year, net profit amounted to $0.8 million. Capacity utilization also crept up a few percentage points to 69%.
However, as UBS commented in a research report, "The operational leverage ahead, which we had initially assumed to arise from better capacity utilization is not validated. Instead the company is attempting to grow sales through incremental new equipment additions. Hence we argue that a rise in depreciation charges is likely to curb margin expansion ahead."
Acting as lawyers on the deal were Shearman & Sterling as issuer's counsel, with Allen & Gledhill as local issuer's counsel. Other counsel was Linklaters and Allen & Gledhill.
