TMT issues light up convertible bond market

Two convertible notes - one by Chinese internet service company Qihoo 360 Technology and one by Taiwan-based Advanced Semiconductor Engineering - are set to re-open the market for Asian companies.
Qihoo, listed on New York Securities Exchange, has a market capitalisation of $9.73 billion and is the largest company of its kind in China in terms of user base.
Qihoo, listed on New York Securities Exchange, has a market capitalisation of $9.73 billion and is the largest company of its kind in China in terms of user base.

Two convertible bonds totalling $1bn issued have broken the summer lull and are expected to re-open the market for issuers from the region.

Advanced Semiconductor Engineering, a Taiwan-based company with a focus on semiconductor assembly and test services, raised $400 million on Thursday. This follows Qihoo 360 Technology, a Chinese internet service company, which raised $600 million the day before, the largest ever issued by a US-listed mainland company and the largest dollar convertible bond in Asia since 2011.

There has been little CB issuance in Asia ex-Japan in recent months, so both Qihoo and ASE notes were welcomed by investors. Only one issuer - Epistar Corp - tapped the Taiwan market in early August with a $250 million bond.

Although the three issuers come from the TMT sector.

Citigroup acted as the sole global co-ordinator on both the Qihoo and ASE deals.

ASE, the world’s largest provider of independent semiconductor manufacturing services in assembly and test, priced its $400 million notes at a zero yield, which is tight compared to the guidance of 0%-1%.

The initial conversion premium was set at 30% over the closing price of NT$25.45 on August 29, an issuer-friendly point versus a guidance range of 27.5%-35%.

Together with a full dividend protection and assuming a 3%-4% slide in the share price today, this resulted in a bond floor of 91.5% and an implied volatility of about 27%.

The deal was more than four times covered with strong support from 130 investors. In the book, demand was fairly evenly split between Asia-based hedge funds and European outrights, a source said.

The deal was with a five-year maturity, a three-year investor put and a three-year issuer call subject to a 130% hurdle.

Credit Suisse, CIMB and DBS are the other joint bookrunners.

Meanwhile, the offering from Qihoo, which specialises in developing internet and mobile security products, was completed on an accelerated basis in order to minimise risk from potential fluctuations in the US market.

The company launched the bond offering with a base size of $550 million early on Wednesday morning, with an overallotment of $50 million, which was fully exercised.

The conversion premium was set at 40%, the middle point of the guidance of 35%-45%. The initial conversion price is $110.964, based on the closing of $79.26 on August 27, the reference price. 

Qihoo’s bond has a five-year maturity, a three-year investor put option and a three-year issuer call subject to a 130% hurdle. The coupon was fixed at 2.5% at launch. Under the conditions that the conversion premium is 35%-45%, the credit spread is 400bp-450bp. The maturity date is on September 15, 2018.

Strong US interest provided good initial momentum with the base deal size covered prior to Asian open. The book closed in the US earlier than expected on Wednesday night, enabling minimal exposure to market risks. Some investors had planned to short in the market to hedge their positions and were eager to confirm how much notes they could get before the market opening, said sources familiar with the situation.

The book was heavily anchored with decent orders and finally four times covered at the price. Around 130 investors participated in the deal, including hedge funds, long-only funds and existing shareholders. Geographically speaking, Asian and US investors are basically equal but there were a few more Asian investors than those from the US.  

The offering was launched at this time because Qihoo’s stock price reached an all-time high at $79.26 on August 27. The price has risen 167% in 2013 and 447% since listing in 2011.

It also captured strong investor appetite for tech-company papers. According to a source, the deal marks the 18th tech deal and 10th software deal out of the US, and the tech sector has outperformed the indexes and most other sectors.

Qihoo’s shares ended 1.7% lower on Wednesday.

Qihoo, listed on New York Securities Exchange, has a market capitalisation of $9.73 billion and is the largest company of its kind in China in terms of user base.

The company had net income of $64.13 million in the second quarter. It has very little debt and hence is viewed as a strong credit. The company has no ratings by major agencies.

China Renaissance Securities and UBS are the other joint bookrunners.

According to a term sheet, the proceeds from the bond will be used for general corporate purposes. However, market analysts said the company has targeted to acquire a search engine company in China. Media reported in July that Qihoo was in talks to buy Sohu’s Sogou search business, China's third-largest search engine firm.

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