Strong demand for Far Eastern Textile exchangeable

The availability of asset swaps and shares to borrow fuel investor interest and allow the deal to be upsized by 20% to $180 million.
Asia Cement has become the first Asian company to complete an overnight deal of size in two weeks, showing that the volatile market doesnÆt rule out raising fresh cash even on an opportunistic basis as long as the offering is reasonably priced.

The Taiwan-listed producer of cement and other building materials sold $180 million worth of bonds exchangeable into Far Eastern Textile. The deal was open for less than two hours but attracted close to $1.75 billion of demand and more than 100 investors, which allowed it to be upsized from $150 million. There is also a $30 million greenshoe that hasnÆt yet been exercised.

The deal, which was arranged by Morgan Stanley, was attractive partly because the stock is shortable, meaning it is possible to hedge the equity option and trade the exchangeable based on the implied volatility. This is still not that common in Asia where most issuers of convertible or exchangeable bonds either arenÆt eligible for short-selling or only have enough stock available to make this a possibility for a very small number of investors. In this case, the company made sure there would be enough stock available to borrow by lending 81 million shares itself.

The bookrunner had also arranged about $115 million worth of asset swaps through local and international banks, which was enough to cover about three-quarters of the base deal size. This was the first Asian equity-linked deal to provide a credit bid since early November and the strong demand showed investors appreciated the effort.

It would also have helped that Asian Cement is considered a strong credit, albeit an unrated one, and that the underlying stock, i.e. Far Eastern Textile, is one of the best performing stocks in Asia so far this year, having risen 19.4%. The Far Eastern group is also viewed as one of the most prominent business groups in Taiwan and with its extensive operations in China it is expected to be a key beneficiary of improved cross-strait relations that many hope will become a reality after the presidential elections in March. Far Eastern Textile, which is the original business of the group, and Asian Cement are linked through a cross-shareholding structure.

All this contributed to the investor interest and meant that despite some price sensitivity to start with, the yield ended up at the tight end of the indicative range while the exchange premium was fixed at the top of the 25% to 30% range. The premium was fixed over yesterdayÆs closing price of NT$45.45, which is only 5.7% below the five-year high of NT$48.20 which the stock hit in mid-January.

The yield was fixed at 0.875%, having been offered in a range up to 1.875%. The bonds have a five-year maturity, but can be put back to the issuer after 2.5 years. They pay no coupon and were issued at par. The issuer can call them after three years, subject to a trigger of 130%.

The asset swaps put the credit at a spread of 200bp over Libor. Other underlying assumptions included a stock borrow cost of 75bp, which is quite cheap by Asian standards, and a full dividend pass-through. This gave an implied volatility of 32.8%, compared with an assumed long-term historic volatility of about 35%, and a bond floor of 89.2%.

The fact that the issuer didnÆt reveal any more specific use for the proceeds than to say that they would go towards making further investments into group companies had seemingly no impact on the demand as this was the second largest order book for an Asian equity-linked deal so far this year. Before the equity markets took a turn for the worse in mid-January, investors submitted about $3 billion worth of orders for a $600 million exchangeable into Malaysian palm oil plantation company IOI Corporation.

Sources say about 65% to 70% of the accounts that came into the deal last night were Asia-based, while the rest were European.
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