Taiwan CBs fire up Asian equity markets

Chi Mei Corp and Quanta Computer take advantage of strong market momentum.

Intense activity in the global convertible market is spilling over into Asia, with three benchmark deals now priced in the space of two days. Following the huge demand generated by a $160 million deal for E.Sun Financial on Monday, Quanta Computer and Chi Mei Corp stepped into the market on Tuesday with a further $425 million in paper.

Pricing on both deals shows just how far the Asian market has moved since the beginning of the year when only the TFT-LCD manufacturers were so needful of 5G funding that they were prepared to cede multiple re-sets and highly defensive structures.

The shift is particularly underlined by the pricing Chi Mei Corp has been able to achieve through an exchangeable into Chi Mei Optoelectronics. This time round, the issuance vehicle is the parent, a petrochemicals producer, rather than the subsidiary, which manufactures TFT-LCD panels. However, BB-rated Chi Mei Corp is intrinsically tied to Chi Mei Optoelectronics, which has an implied single B rating, because it guarantees a large percentage of the latter's debt and invests much of its free cash in it through private share placements.

Terms on the five-year deal, led by house bank Morgan Stanley, comprise a zero coupon bond with an exchange premium of 30% over a spot price of NT$27.8 and a redemption price of 101.26%. The deal is callable after two years subject to a 115% hurdle and puttable after two years at 100.5% to give a yield-to-put of 0.25%. There is also a $25 million greenshoe.

Underlying assumptions show a bond floor of 94.9%, theoretical value of 106.5% and implied volatility of 24.4%. This is based on a credit spread of 150bp over Libor, zero dividend, zero stock borrow and volatility assumption of 37%.

One of the most striking aspects of the deal is the combination of an exceptionally high exchange premium with a low bond floor for a one-year deal. By contrast, most of the deal's predecessors appeared to sacrifice a point or two of bond floor in return for securing additional premium.

Nevertheless in Chi Mei's case, strong demand led books to close 7.5 times covered within the space of two-and-a-half hours and for the deal to immediately trade up to 102% in the grey market. A total of 120 accounts participated, with everyone capped at $10 million. By geography, the book split 50% Europe, 25% Asia and 25% offshore US.

Like most recent deals, observers say the transaction was driven by credit demand. About half the book is expected to be immediately asset swapped, with a percentage of the remaining investors opting to sit on the credit piece a while longer in a belief that credit spreads will tighten further.

A second key driver of the deal was Chi Mei's stock price. Although the stock has traded up 7% on each of the last two trading days, it is still down 2.56% on the year and underperformed the TWSE, which is now up 8.529% on the year. The stock is also trading at only one times 2003 book value, a level most analysts would consider a historical low and given the intense peaks and troughs of the TFT-LCD cycle, clearly has the potential to rocket.

The deal represented 8.3% of Chi Mei's issued share capital, but this is expected to drop to 6.7% pending the completion of a rights offering at the end of the month.

At the other end of the rating scale for Taiwanese tech companies, Quanta Computer completed a $250 million convertible via Merrill Lynch yesterday (Tuesday). With a BBB- rating, the PC manufacturer is considered one of the benchmark issuers from the Taiwanese tech sector.

In this instance, the lead also coined a new name for the deal, which was originally mandated to UBS Warburg. Known as StAYRs, or step adjusted yield reverse securities, the five-year transaction has a negative yield and a put schedule that progressively steps downwards.

Terms comprise a zero coupon bond and a conversion premium of 32% to a spot close of NT$74.5. The deal was issued at par, but redeems at 97.525%. It also has a first put after 22 months at 99.085% and a second after 36 months at 98.507% to give a yield-to-put of -0.5%. It is further callable after three years subject to a 120% hurdle and there is a $50 million greenshoe.

Underlying assumptions give a bond floor of 94.5%, theoretical value of 103% and implied volatility of 36%. This is based on a credit spread of 120bp over Libor, 5% borrow cost, 2.8% dividend yield and 43% volatility assumption.

Like Chi Mei, Quanta has also managed to secure an extremely high conversion premium - the second highest on record after UMC's convertible of December 2001. Unlike Chi Mei, the stock price has already performed strongly this year, as investors move into downstream tech plays to take advantage of a perceived uptick in consumer demand.

Year-to-date, it is up 30.7%, with 8% of this figure occurring over the past two trading days.

Observers describe both Chi Mei and Quanta as directional plays, with investors looking to buy into rallying stock markets and fuelling huge demand because supply is not keeping up with a much larger number of redemptions. However, while many bankers now believe there will be significant deal flow over the coming two months, a number are starting to worry that intense competition for mandates will prompt the kind of overly aggressive pricing that could stop the market in its tracks.

As one cautions, "I can't remember the last time conditions were this good. But my fear is that it won't last because we may now be one small step away from a step too far. Someone is going to come along with a deal that's either too big, or pricing that's too crazy. We've already just seen it in Europe with Alcatel's deal."

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