Morgan Stanley led a blow-out transaction for the Taiwanese semiconductor company yesterday (Tuesday), with books for a $302 million deal closing 15 times oversubscribed in the space of an eight hour marketing period.
The deal marked the first instance of an Asian company selling a convertible into Treasury shares and as such necessitated a number of structural tweaks. The principal one was a shorter-than-expected maturity of 2.25 years, a reflection of the fact that under Taiwanese law companies cannot issue dividends into Treasury shares. UMC, which wanted to dispose of all of its available Treasury shares, normally pays a high stock dividend of about 15%.
The deal was priced with a zero coupon and a conversion premium well through the indicative range (30% to 35%) at 40% to the company's intra-day ADR price of $8.37. The ADR had closed the night before at $7.99 and following a 6% rise in the local stock price, opened in New York up 5% to the previous night's close of $8.37. There are 129.035 million Treasury shares available, where one ADR equals five shares. Conversion into Treasury shares can be in either local or ADR format.
Yield-to-maturity came at 0.75%, the tight end of the indicative range and equating to a spread of 200bp through Treasuries. There is also a call option after one-and-a-half years subject to a 130% hurdle. There is no put.
Alongside the lead, Lehman Brothers was co-lead, with co-managers comprising ABN AMRO, Daiwa, Deutsche Bank, National Securities and UBS Warburg.
In virtually every respect, the deal broke the mould of Taiwanese convertibles, most of which have very little equity value and are typically asset swapped back into the domestic market. As such the deal had a much lower bond floor than is normally seen in Asia and the conversion premium fell in line with the high premiums achieved by the world's top tech companies in the US market.
Consequently the bond floor stands at 88.5% with fair value at 102% based on implied volatility of 50%. The (cash) dividend yield is zero and the stock borrow cost calculated to be roughly 2% to 3%. Despite the fact that UMC has a hugely liquid ADR, observers comment that there is often very little stock borrow available because investors start shorting the stock once the ADR premium widens out to a certain level against the local stock. Currently, the premium is at a high level of about 37%.
This premium was said to have deterred some equity accounts from participating in the deal, with the majority of the book said to be outright accounts, followed by hedge funds and fixed income investors. In total about 150 to 200 investors were counted, resulting in an allocation split of about 60% Europe, 20% US and 10% Asia. Only about 10% to 20% of investors were said to be new to Taiwan.
In terms of credit spread, UMC was priced on the basis of an implied BBB level equating to about 200bp to 250bp over Libor. In Asia, the nearest pricing comparable is provided by Singaporean semiconductor company Chartered Semiconductor.
In late March, the group launched a $500 million five-year bullet deal with a coupon of 2.5%, a conversion premium of 33% to a spot price of S$4.90 and yield-to-maturity of 5.25%. This deal had a bond floor of 92% and fair value at 110%. At the time, there was very little agreement on where the credit spread should lie, with market players arguing anywhere from 175bp over Libor to 300bp over. Lead manager Merrill Lynch marketed the deal at 200bp to 250bp over.
Most outside observers conclude that the overall terms for UMC's deal are fair, although a number argue that they err slightly on the generous side. Believing that UMC could have shaved the yield-to-maturity down to zero, one banker points out that the deal traded up to 105% almost immediately after breaking syndicate.
The lead and the company, however, are likely to be extremely pleased with the transaction, which has been timed to hit a re-bound in the tech sector and positive momentum following the completion of national elections in Taiwan. For investors looking for equity participation, but not wholly convinced that the semiconductor cycle has turned, the UMC convertible offers an attractive instrument with equity upside and downside protection.
Coming against a global backdrop of heavy issuance in the US and European convertible markets, the deal also benefits from a relative lack of issuance from Asia, aside from KDIC's exchangeable, which also priced yesterday.
Analysts note that the convertible has caught upward momentum in UMC's share price, which closed yesterday at NT$43.5. Year-to-date, the stock is up 6.66%, but has underperformed the index, up 27.34% on the year. The company's main competitor TSMC revised its fourth quarter earnings forecasts upwards last week and the positive news also begun to flow through to UMC as well.
"As the industry leader, TSMC will be the first to benefit from any turn in the cycle, but UMC and Chartered Semiconductor won't be far behind," one non-syndicate banker comments. "This deal couldn't have come at a better time."