Taiwan paper maker achieves high premium with CB

The $100 million bond issue can be exchanged for shares in Prime View International, which is attracting attention because of its move into e-paper.
After more than seven months without any publicly marketed equity-linked issuance from Taiwan, the market stirred to life last week with two deals û both offering exposure to the tentative recovery in the liquid crystal display industry.

Grabbing most of the attention was the $125 million convertible for Chunghwa Picture Tubes on Thursday, but in the wake of that, Yuen Foong Yu Paper Manufacturing completed a $100 million exchangeable that achieved the rare combination of a relatively high (for Taiwan at least) conversion premium of 25% and a zero percent yield.

The paper manufacturer is no stranger to the capital markets and was in fact the first Taiwanese company ever to issue a convertible bond back in 1989. This time, however, the bonds don't entitle the holders to buy equity in the company itself, but in its subsidiary Prime View International (PVI), which makes small- and medium-sized thin film transistor-liquid crystal display (TFT-LCD) panels. The panels are used in products like mobile video systems, camcorders, digital cameras and car navigation systems.

A source close the deal says Yuen Foong Yu helped set up PVI in 1992 as something of a hedge in case consumers were to embrace the paperless society and it currently holds about 30% of the company. If the bonds are exchanged in full, that stake will be reduced by about one-third. The paper company said it will use the proceeds from the bond sale to buy raw materials in the international markets.

The bonds have a five-year maturity, but can be put back to the company after two years. However, investors who chose to do this or hold the bonds to maturity will receive no return on their investment as the put price, the redemption price and the issue price are all set at par. The bonds also won't pay a coupon in the meantime, which further underlines the fact that Yuen Foong Yu is keen to offload the Prime View shares.

There is an issuer call after two years, subject to a 130% hurdle, to force bondholders to convert if the share price continues to perform strongly. If it doesnÆt, there is an exchange premium reset on each anniversary down to a floor of 80%.

Deeming from the rally in PVIÆs share price over the past six months, investors are clearly interested in the stock. The reason, observers say, is the companyÆs move into the electronic paper business through its acquisition of PhilipsÆ e-paper division in 2005. E-paper refers to a flexible display technology designed to mimic the appearance of ordinary ink on paper. Unlike a conventional flat panel display, e-paper doesnÆt require a backlight as it reflects light like ordinary paper. The advantage is that the image can be changed at any time.

Since the company announced in mid-May that it had started volume production of a type of e-paper, its share price has gained about 166%, including a 10.4% rise in the two sessions after the bond sale. (The Taiwan market was open on Saturday to compensate for the mid-Autumn holidays earlier in the week.)

The bonds were offered to investors in the early evening Hong Kong time on Friday with an exchange premium of 22% to 27% over that dayÆs closing price of NT$53 and after just about half an hour sole bookrunner Credit Suisse had received sufficient demand to fix the premium at 25%. A clear indication of the strong demand for the equity was that the pricing indicated a bond floor of only 88%. With a two-year put, that translates into a cost of six basis points per year for the equity option û a price that normally would require a conversion premium in the teens.

As an incentive, Credit Suisse provided asset swaps for 50% of the deal at a spread of 185bp over Libor. The bonds have a full dividend pass-through and the stock borrow cost was assumed at 5%. This gave an implied volatility of 30.7%, which compares with a 100-day vol of about 70% and a 260-day vol of just over 56%.

According to the source, individual order sizes were capped at $10 million, but the 15 or so investors who came into the deal still managed to put in more than enough orders to cover it in full. European and Asian investors each accounted for about half of the demand.
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