Taiwan Glass Industrial raised $100 million on Monday from a five-year convertible bond, even as European stocks fell 2% amid fears of a conflict between Russia and Ukraine in Crimea.
Investors pushed a hard bargain given the uncertain market conditions but the willingness of Taiwanese banks to swap out the bond portion made the deal attractive to hedge funds — and were particularly important given the lack of stock available to hedge the equity piece.
The ability to hedge the credit risk basically turns a CB into a levered warrant, which means that heightened volatility only helps to make the option more valuable.
It also helped that Taiwan Glass offered some differentiation from the usual roster of Taiwanese tech firms. It is an industrial company that makes a broad range of glass products and is a specialist in the kind of high-efficiency panels used in skyscrapers and other modern buildings.
The terms of the CB were more conventional than its previous 2011 deal — a $300 million three-year trade that offered zero coupon and zero yield, and which is now deeply out of the money after pricing with a conversion target of NT$61.49. The stock closed yesterday at NT$29.05.
Yesterday’s CB priced at the investor-friendly end with a zero coupon, 1% yield and 20% premium, which is a much more vanilla type structure for a Taiwanese deal, especially when there was enough asset swap to cover 80% of the transaction.
Standard Chartered, which has a strong lending relationship with Taiwan Glass, was sole bookrunner on both deals and, according to one source, ended up holding most of the 2011 deal (which is due for repayment in July this year).
There was no upsize option, which suggests that the issuer had a specific use for the funds — probably redeeming the investors in the original deal.
The CB has a two-and-a-half-year put and the conversion price worked out at NT$35.50, with investors seemingly willing to bet that the option would pay off despite the stock’s weak performance since the last deal.
With 80% of the transaction available through asset swaps, sources estimate that this was equivalent to the rough size of the hedge fund participation in the order book. The rest of the deal went to outright investors in Europe.
There was very little trading in the bond after pricing as most of the investors have hedged the credit and held on to the option.
The deal was marketed with a credit spread of 230bp over Libor. At the final terms, this resulted in a bond floor of 95.4% and an implied volatility of roughly 22% and a theoretical value of 102.2. However, the stock had slipped 1.9% in morning trading on Tuesday, pushing the fair value to less than 102.