Taiwan remains at fore of Asian primary markets

As Powerchip prepares to launch a new convertible, First Financial holds an analysts'' meeting for a debut GDR and Cathay Financial mandates a benchmark equity offering.

Taiwan continues to dominate equity issuance from non-Japan Asia, with tech companies starting to take advantage of soaring stock prices and financial holding companies seeking to accumulate bigger war chests as consolidation gathers pace.

The big news of the week so far is plans by Cathay Financial to issue a $400 million to $600 million GDR offering. Asian specialists say JPMorgan has been mandated to lead the deal, although the bank itself declined to comment. A number also believe that a second and as yet undisclosed bank has been bought on board - a rumour fuelled by the fact that virtually all benchmark equity offerings now have more than one bookrunner.

If correct, JPMorgan's inclusion is far from surprising given the close relationship it has cultivated with Cathay in recent years. Having advised the group on the formation of a financial holding company structure in 2001, it went on to help it seek a rating in 2002 and created the alliance with Fubon, which helped it successfully bid for a chunk of Chunghwa Telecom shares in December last year.

Following a domestic filing, a deal is expected to begin pre-marketing at the beginning of July, with roadshows conducted in mid-July and pricing tentatively scheduled for August 1. The market is already talking of pricing around a 5% discount to spot.

Cathay has 35% of its shares in freefloat and a market capitalization of $10.57 billion, based on 8.3 billion outstanding shares and a current share price of NT$44.1. Year-to-date, the stock is up 19.51%, although some have wondered why the group is in such a rush to access the market, since it has been a steady rather than a stellar outperformer.

One reason may be that having consistently shown its determination and ability to lead the FHC sector from the front, Cathay is conscious of a growing pipeline of competitors seeking to raise tier 1 capital, which may quickly sate demand.

Its fundraising is also more likely to be viewed as a precursor to a new round of M&A activity rather than as a necessary capital cushion. As of December 2002, the group reported an overall CAR of 10.9% of which 8.6% constituted tier 1 capital. Based on company pronouncements about asset growth and NPL write-offs for the current financial year, analysts believe the group's CAR will remain steady around 2002 levels, removing the need for a further capital injection.

The same cannot be said of First Financial, which held an analysts' meeting last Friday for a similarly sized $600 million GDR. With Citigroup and Deutsche Bank mandated as joint bookrunners, three other banks are now believed to have joined the syndicate - ABN Amro, Daiwa and ING.

Similar to Cathay, pre-marketing is scheduled to commence during the first week of July, followed by formal roadshows in the middle of the month and pricing at the end of the month.

In order to avoid pricing at a sizeable discount to spot, observers say the group needs to present a very convincing case about future management structure and strategy at a time of immense change within the bank and sector. In its favour, First Financial has been extremely aggressive about cleaning up its asset base and writing down NPLs, despite the kind of high government ownership levels, which usually crimp unprompted reform.

However, there is little visibility about future consolidation and the shape of the highly fragmented and increasingly competitive banking sector. In First Financial's case, the government has also made its intention to sell-down very clear. Earlier this year, it stated that it hoped to sell the Bank of Taiwan's 12.3% stake in the group via a GDR and find a strategic investor for its own 23.7% stake held through the Ministry of Finance.

Before either of these two deals and pending final regulatory approvals, traders say DRAM manufacturer Powerchip is expected to launch a convertible bond this Thursday. Lehman Brothers has the mandate for a $112 million offering, which has a zero coupon annual puttable structure.

The transaction is said to have been filed with an incredibly wide range of 11% to 26% for the conversion premium, but this is hardly surprising given the volatility of the underlying share price. Having hit a year-to-date low of NT$6.9 in early May, the share price has rocketed 100% over the last three weeks, reflecting a long awaited recovery in DRAM spot prices and producers' expectations of breaking even again by July.

Yesterday, it closed at NT$13.4, up 34% on the year.

However, given the extreme swings to which the sector is prone, the deal is also believed to incorporate a number of re-sets, the first of which kicks in after only four months. The second then falls after nine months and every year thereafter.

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