Taiwan’s Epistar attracts huge demand for $250 million CB

The deal came with both asset swaps and stock borrow and was upsized by 25% after being covered in 15 minutes.
Epistar is the market leader in LEDs used for backlighting in laptops, mobile phones and TVs
Epistar is the market leader in LEDs used for backlighting in laptops, mobile phones and TVs

Epistar Corp, the Taiwan-based manufacturer of light-emitting diode (LED) chips and wafers, has raised $250 million from the sale of convertible bonds. The deal attracted a huge response and was upsized by 25% from the initial $200 million.

According to a source, the offering was covered in 15 minutes and when the order books closed after two hours (at 5pm Hong Kong time) more than 170 investors had come into the deal. The final deal size was said to be as much as 10 times covered, although after taking out the inevitable order inflation the real demand was probably closer to six to seven times the amount of bonds on offer, the source said.

Hedge funds liked the fact that there were both asset swaps and stock borrow available, while outright investors appreciated the possibility of a back-ended yield.

As the market leader in LEDs used for backlighting in laptops, mobile phones and TVs as well as for traffic lights and other general lighting, Epistar should be the first company to benefit from the potential turnaround in the industry that is forecast by some analysts. Of the 22 analysts who cover Epistar according to Bloomberg, 13 have a “buy” rating on the stock and another five recommend investors to hold.

Also, the deal was well flagged through its filing in late June, so investors had plenty of time to get their heads around the equity story.

Add in the fact that there has been little CB issuance in Asia ex-Japan in recent months and one can see why the company was able both to upsize the deal and to push the pricing towards the investor-friendly end.

The deal structure was standard enough, with a five-year maturity, a three-year investor put and a three-year issuer call subject to a 125% hurdle. As with most Taiwan CBs, it came with a fixed 0% coupon.

It was offered with a yield between 0% and 1%, and a conversion premium of 25% to 30% over yesterday’s closing price of NT$50.10. Thanks to the strong demand, the issuer was able to fix the premium at 30% for an initial conversion price of NT$65.13, while the yield was set at 0.25%.

The conversion price is close to the 12-month high of NT$65.15 that the stock reached in September last year, although since then it has been pretty volatile. In November 2012 in traded as low as NT$39.60 and in early June this year it was back above NT$60 for a few days before edging lower again.

The deal came with about $140 million of asset swaps at 250bp above Libor, which were sourced by the bookrunners but provided by Taiwanese banks. There should be enough stock borrow in the market to cover the hedging needs for the CB investors at a cost of about 3.5% to 4%, the source noted.

Together with a full dividend protection and assuming a 3% to 4% slide in the share price today, this resulted in a bond floor of 91.2% and an implied volatility of around 32%. That compares to an historical vol of 30% to 35%, depending on which period one looks at.

So the deal wasn’t exactly cheap, although the fair value worked out at about 101, which is also where the CB was indicated in the grey market yesterday evening. However, CB specialists said there was little to no actual trading in the bonds.

The deal might have seemed a better fit for hedge funds, given the somewhat uncertain equity outlook and the fact that both the credit and the equity options can be hedged. In the event, however, demand was fairly evenly split between Asia-based hedge funds and European outrights, the source said. The allocation was expected to reflect that.

Late last night investors were told that only about half of the accounts that had submitted orders would actually receive bonds, leaving some 85 investors with a zero allocation.

The proceeds will be used to refinance an existing CB that was issued in 2011 and becomes puttable in January 2014. That deal, arranged by Barclays, was initially $280 million and currently has $273.2 million worth of bonds left outstanding. It is trading well out of the money and, barring a sharp turnaround in the LED industry in the next few months, is not very likely to convert into equity before the put option comes into play.

Like this latest deal, the 2011 CB also had a 30% conversion premium and a zero percent coupon, but offered no yield. The fact that the pricing is so similar makes yesterday’s CB a pretty good deal for the issuer, particularly in light of the fact that the credit spread back in 2011 was only about 145bp to 150bp.

The shortage of new CB issuance this year seems to be an issue for outright investors in particular, and one CB specialist noted that some deals, such as Asia Cement and Far East International Bank, have managed to price very aggressively thanks to the competition for paper among outright accounts.
Hong Kong software developer Kingsoft reopened the Asian CB market in early July after six weeks with no issuance at all. The Hong Kong dollar-denominated deal, which was led by JP Morgan, Morgan Stanley and Macquarie, was well received by both hedge funds and outright investors thanks to a decent coupon (3%) and a stock lending facility, and was upsized in full to $175 million. The conversion premium was fixed at 28.5%.
Since then there have been two more issues, but both were quite small. Haitong International, the Hong Kong investment banking arm of Chinese brokerage firm Haitong Securities, raised $100 million from another Hong Kong dollar-denominated deal that was priced with a 1.25% coupon and a 13% premium. HSBC was the sole bookrunner.
And Flexium Interconnect, a Taiwanese manufacturer of flexible printed circuit boards for computers, LCD screens and a variety of consumer electronics, sold $100 million of three-year CBs with a two-year put. The zero-coupon deal was arranged by Taiwanese securities firm Yuanta, but was offered to the international market and did attract some international hedge funds, according to sources at the time. The conversion premium was fixed at a low 3.77%.

Citi was the sole global coordinator for yesterday’s deal, as well as joint bookrunner together with Morgan Stanley and Standard Chartered.

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