With Citibank Taipei as sole lead, the company followed recent precedent by opting for a zero coupon, two year put structure with a low conversion premium and high yield.
Raising $75 million, the five-year par-in, par-out deal came at the outer end of its indicative range and has an 8% conversion premium (7% to 15% indicated). This equates to a conversion price of NT$44.37. The deal is callable after one year subject to the 130% trigger and has a put option in year two at 112%, equating to 100bp over Treasuries, or a yield-to-put of 5.83%. The deal is also puttable in year three and four at par. There was no further syndicate.
Underlying assumptions comprise a credit spread of 320bp over Libor, implied volatility of 15%, historic volatility in the high 50's, a bond floor of 95% and fair value of 115%.
Officials report the participation of about a dozen investors, with a geographical split of 60% Asia and 40% Europe. Of this number about 60% comprised fixed income investors, 30% hedge funds and 10% other.
"Because the balance sheet of this company is so strong, the deal attracted a lot of interest from fixed income players," says one banker. "Books were three times covered and because of the strong interest, we did not take as much of a proprietary stake as we might normally."
In the past, Citibank has often simply retained the bond portion for itself and stripped out the equity option to sell to hedge funds, which in this particular instance, would have been attracted by the wide differential between implied and historic volatility.
Terms on the deal are most similar to a $210 million convertible for Ritek led by Salomon Smith Barney at the end of April. This also had a zero coupon, with a par-in, par-out structure that was puttable after two years at 112.5%. Equating to a treasury spread of 157bp and a yield-to-put of 5.854%, the deal is currently trading at 5.699%.
In line with this year's relatively strong performance of the Taipei Weighted Index, conversion premiums have become depressed, with Systex securing 8% on the back of a year-to-date uptick of 35.61% to Thursday's NT$41.1 close.
Proceeds will be used to fund the company's expansion into Greater China. At the end of last year, the company formed a strategic relationship with Yahoo in a bid to break into the Mainland market. The two hope to use Yahoo's international knowledge with Systex's systems integration expertise to develop the market.
At the end of the 2000 financial year, Systex reported extremely strong debt ratios. With a debt to equity ratio of 16%, the company also maintains high interest coverage at 15.28 times. Net income also increased from NT$900 million in 1999 ($26.4 million) to NT$1.059 billion in 2000 ($31.5 million).
Citibank's next deal will be a convertible for Accton Technology that should launch within the next one to two weeks.