Taiwanese computer and home appliances manufacturer Tatung Corp monetized a 3% stake in TFT-LCD manufacturer Chunghwa Picture Tubes (CPT) yesterday (Monday). With ING as lead manager, a $79.6 million deal was closed within three hours of launch after books passed eight times oversubscription.
The credit-enhanced deal breaks the mould of recent Taiwanese equity-linked deals and as such investors were said to have found the combination of ING's credit strength and CPT's low stock valuation appealing. Final pricing came at the tight end of terms, with the conversion price breaking the filed range of 5% to 20%.
Terms comprise a three-year final maturity, with a zero coupon, premium redemption structure. The conversion premium was set at a 22% premium to an NT$12.05 spot close, with the yield-to-maturity coming in at 0.39%, equivalent to Treasuries minus 150bp and the redemption price at 101.18%. The deal is callable after two years subject to a 120% hurdle and has no puts. There is also no greenshoe.
Like most recent equity linked deals, the transaction was given extra optionality by the addition of two re-sets - with one re-set at 18 months subject to an 80% floor and a special re-set at the option of the company 30 days prior to maturity at 91.98% of the market price.
The deal is expected to be awarded an AA- rating from Standard & Poor's in line with ING's stand-alone rating and is backed by an $80.54 million Letter of Credit (LoC), which closed syndication in Taiwan last week. The deal itself has been well flagged over previous weeks, but launch was dependent on the LoC, which was signed in Taipei on Thursday.
Underlying valuations comprise a bond floor of 93.56%, theoretical value of 106.9% and implied volatility of 20.6%. This is based on a credit spread of 30bp over Libor, 6% borrow cost, zero dividend yield and 35% volatility assumption.
CPT does not have a GDR outstanding, although it has long hoped to raise straight equity and bankers says the best current hedge is the company's $125 million convertible of November 2002 led by ABN AMRO. Where the credit spread is concerned, specialists add that it was valued at a slight premium to the CDS level of ING paper in Europe, which trades at 25bp to 29bp on a five-year maturity.
Says one observer, "This deal was mostly driven by ING's underlying credit strength and 6.5 points for a three-year option represents very good value for investors."
Commenting on the high premium he adds, "Even at 22% there is no three-year paper out there this close to being in-the-money."
And while the cost of the LoC has not been made public, the all-in cost to the borrower is said to fall between 1.75% and 2%, considerably cheaper than a stand-alone deal at the same maturity. Tatung is said to be an implied BB credit, with the LoC able to be syndicated at a relatively aggressive level because of Tatung's long standing Taiwanese banking relationships.
Pre-deal, the group had a 34% direct stake in CPT and 54% indirect stake. Year-to-date, CPT is up 5.70% and is trading on a price to book valuation of about 1.1 times 2003 earnings, slightly below the sector average.
The company has tended to trade at a discount because of questions about its long-term competitiveness. CPT is the only major producer moving to 4.5G rather than 5G and while TFT-LCD panels now represent the majority of sales, the company is still reliant on increasingly outdated cathode ray tubes (CRTs). Analysts forecast that for the 2003 Financial Year, TFT-LCD panels will account for about 50% of sales, with CRT's on a combined total of 42%.
CPT's lack of scale also makes it less capital efficient than competitors such as Au Optronics and Chi Mei Optoelectronics. As of 3Q2002, for example, it was returning an ROE of only 1.7% and annualised ROIC of 2.7%
A total of 60 investors are said to have participated in the transaction, with a geographical split of 60% Asia, 40% Europe. The book was also said to have been build around outright accounts, with no primary swaps. Grand Cathay was co-manager.
At Asia's close, the deal was said to be trading up at 102.75% bid.