After two months with no issuance, Taiwan-based Zhen Ding Technology Holding last night reopened the Asian convertible bond market with a three-year deal. The company, which is new to the international markets, refrained from being too aggressive on price and was awarded with solid demand from new issue-starved investors, which allowed it to exercise the entire upsize option as well as half the greenshoe.
This resulted in a total deal size of $175 million and the bookrunners still have the option of exercising the remaining $25 million of the greenshoe in the next 14 days. The CB comprised a base deal of $130 million plus a $20 million upsize option and a $50 million greenshoe.
Zhen Ding makes printed circuit boards (PCB), including flexible printed circuit boards (FPC) that are key components of smartphones and tablets. It is a subsidiary of Hon Hai Precision Industry and was spun off for a separate listing on the Taiwan Stock Exchange at the end of December last year. Like with most Taiwan listings, the IPO was an entirely domestic affair so the CB is the first real opportunity for international investors to buy into the company in a meaningful size.
It is no coincidence that it is a Taiwanese company that is re-opening the market as the availability of asset swaps in Taiwan makes CBs out of here more palatable for investors. Indeed, sources said the bookrunners provided enough asset swaps to cover the entire deal. About half of that came from DBS, which was one of the four bookrunners, while the rest was sourced from Taiwan banks. Not all of it was taken up, however, which may partly be due to the fact that one-third of the demand came from outright investors, who typically aren’t that concerned about hedging the credit.
As is typical for Taiwan CBs, the deal came with a zero percent coupon, but offered a yield-to-maturity of between 1.0% and 1.5%. The conversion premium was marketed at 10.4% to 15.4% over the five-day average close of NT$89.68. Both were fixed at the investor-friendly end, resulting in a yield of 1.5% and a conversion premium of 10.4%.
There is also a call after one-and-a-half years, subject to a hurdle of 125%.
The terms are similar to those achieved by Pegatron Corp on its $300 million five-put-three CB in late January. Pegatron, which designs and manufactures desktops, laptops, smartphones, games consoles and LCD TVs for Apple and others, priced its zero-coupon CB with a 1.5% yield and a 12% premium over the latest close.
However, Zhen Ding’s share price jumped 5.4% yesterday to NT$94.50, so compared to the latest close, its premium works out at only 4.8%. The initial conversion price is NT$99. One source said that contrary to many other Taiwanese companies that treat CBs largely as a credit instrument, Zhen Ding is keen for the bonds to convert into equity, so a low conversion premium makes sense.
Also, the stock has almost doubled since it debuted at NT$50 five months ago. Since early February it has pretty much hovered in a range between NT$90 and NT$100, aside from an upward push to a high of NT$111.50 in mid-April, suggesting that further near-term upside may be limited. The company currently has a market cap of about $2.1 billion.
Although, earlier this month CLSA said in a research note that it sees opportunity for the Taiwan FPC makers to gain market share from their Japanese competitors within Apple’s supply chain as they currently account for only 25% of the FCP supplies, versus 65% for the Japanese. Zhen Ding should also benefit from its affiliation with the Hon Hai group, the securities brokerage said as it initiated coverage on the stock with a target price of NT$115.
Sources said the deal was covered one-hour after the 5pm launch and multiple times covered when it closed at 7pm Hong Kong time. The order flow got pretty momentum-driven and the orders bigger towards the end when investors realised that it would be a successful transaction, which is perhaps not that surprising after a couple of months with no new paper at all.
The demand was also evident in the gray market where the CB was offered at 100 to 100.5 during the bookbuilding.
More than 70 accounts came into the deal, although a lot of accounts supposedly didn’t receive bonds at all as the bookrunners tried to favour outright investors in the allocation.
The CB was marketed at a credit spread of 300bp over Libor, a 5% stock borrow cost as there is virtually no borrow available, and full dividend protection. At the final terms, that resulted in a bond floor of 93.5% and an implied volatility of 20%.
According to the term sheet, Zhen Ding will use the proceeds for plant expansion, machinery and other equipment purchases and for loan repayment.