UMC became just the sixth Taiwanese issuer to access the equity-linked market this year on Wednesday (September 28) when it completed a $381.4 million convertible via house banks Lehman Brothers and Morgan Stanley.
The transaction marks the first time UMC has come to the CB market in its own name since December 2001. Since then it has completed two exchangeables into AU Optronics, both executed in 2003. The two are currently bid around the 119% level.
However like the 2001 CB, the new deal is also backed by Treasury shares and consequently has a short-dated structure, maturing in February 2008. Terms embrace a zero yield structure, with an issue price of par, zero coupon and redemption price of par.
There is a put option after 18 months with a 130% hurdle, but no put option. The conversion premium was set at a 17% premium to the group's $3.26 ADR close on September 27.
Underlying assumptions comprise a bond floor of 88.8%, implied volatility of 28% and theoretical value of 103%. This is based on credit spread of 50bp over Libor, full dividend protection, 2.5% borrow cost and volatility assumption of 30%.
True to form, UMC was able to achieve aggressive terms thanks to the combination of its strong credit standing (BBB+ rating), rarity value and hedgeability. Specialists estimate there was about $100 million of borrow in the common stock at a cost of roughly 1% for investors able to get in early and $60 million in the ADR at a cost of about 1.5% to 2%.
At 88.8%, UMC has achieved the second most aggressive bond floor for outstanding deals after Ritek, which achieved an 84% level in April 2004, albeit with three re-sets. Investors consequently paid just over 11 points for the equity option in return for a two point differential between the implied and assumed volatility.
UMC's historic (100) day volatility currently stands at 30.1%, a steep drop from 2001 when it stood at over 60%. The company's credit spread has also undergone a big shift since 2001 when it was valued around the 225bp level for a 2.25 year, non-puttable deal.
The order book for the new deal is said to have closed just over 10 times covered, with participation by roughly 200 accounts. Very little asset swapping was noted in the primary market, with most investors opting to hold the deal outright.
Year-to-date is up UMC 7.33%. Between mid-April and mid-June, it shot up from NT$16 to NT$22, but has had a volatile time since then - swinging backwards and forwards in an NT$19.50 to NT$23 band. The stock is currently valued towards the low end of its historical trading band around 1.3 times price to book.