Based on the effective maturity dates, the Citigroup-led US dollar-denominated deal is the longest tech sector CB of size out of Asia since early 2005. Both tranches have a final maturity of seven years, but investors can put them back to the issuer after four and five years.
The company, which was initially considering a high-yield bond to cover its financing needs, wanted as long a tenor as possible but agreed that it would make sense to use two maturity dates in order to split up the payment liabilities. The market capacity for five-year paper was also taken into account when the trade was structured, a source familiar with the offering says.
The total deal size of $165 million, which may be increased to $190 million if the greenshoe is exercised, was split evenly between the two tranches.
Aside from tranche B having a slightly higher yield and assuming a wider credit spread to account for the longer duration, the two tranches have a very similar structure, including the same conversion price. Both of them were marketed with a conversion premium ranging from 37% to 39% over TuesdayÆs close of S$0.73 and priced at the mid-point to give a conversion price of S$1.0074.
The narrow premium range - and for a technology stock quite a punchy final premium of 38% - was said to be a function of the company wanting a conversion price above S$1.00. The longer maturity helped convince investors to accept that, while a wider yield range ensured there was enough momentum in the book to allow the yield too to be pushed to the middle of that range.
Tranche A, which has the four-year put, was priced with a yield of 5.50% compared with an offering range of 5.25% to 5.75%. Tranche B, with the five-year put, was priced to yield 5.95% after being offered at 5.70% to 6.20%.
Both tranches were issued at par and will pay a coupon of 1%.Both tranches are subject to a 130% hurdle.
Contrary to what could have been assumed, the level of demand was quite similar for both maturities with each of the two tranches about four times covered, although the number of investors participating in tranche A was slightly larger at 60, compared with about 50 for the longer tranche B.
The geographical distribution was also fairly similar with just under 50% of each tranche (46% and 48%) ending up with European investors and about one third with Asia-based accounts. The remainder went to offshore US clients.
ôA scarcity of tech paper this year definitely played a role but most of the interest was likely company specific,ö one observer says, noting that investors seem comfortable that the management will continue to deliver on its expansion plans without becoming too aggressive.
UTAC is the worldÆs sixth largest outsourced semiconductor assembly and test (OSAT) company, but while strong within the test segment, it is significantly smaller than many of its competitors, including Singapore-based STATS ChipPAC, with regard to its assembly capabilities.
To improve its market position and technology the company has acquired a couple of other sector players in the past couple of years and $175 million of the proceeds from the CB will go towards paying off a bank loan used to fund the purchase of NS Electronics Bangkok (1993) which was completed in June. NS Electronics has since been renamed UTAC Thai Ltd.
While the chip making industry is obviously a volatile one, most analysts have a favourable outlook on the company and the sector.
According to a ratings advisory by Standard & PoorÆs Ratings Services issued in connection with the offering, the OSAT industry is ôlikely to enjoy stronger growth than the overall semiconductor industry because of increased outsourcing from integrated device manufacturers and the larger market share of fabless semiconductor companies which have no in-house manufacturing facilities.ö
OSAT companies are expected to account for 43.6% of the overall semiconductor assembly and test market this year, up from 41.2% in 2005, the ratings agency says.
S&P gave the company a rating of BB-, which it said reflected the high industry risks, including high capital intensiveness, volatile demand and rapid technology changes, as well as the companyÆs relatively smaller scale and negative free operating cash flow. On the positive side, UTAC has a moderate debt leverage and strong partnerships with its customers, which has allowed it to maintain a high capacity utilisation and above-industry-average profitability since 2004.
In the third quarter this year, which included a full contribution from UTAC Thai, revenues jumped 91.9% from a year earlier to $162 million, while net profit rose 62.9% to $17.1 million. The results marked the 13th consecutive quarter of sequential revenue growth and profitability.
The underlying assumptions on the bonds included a dividend yield of 1% and a stock borrow cost of 5%, since the share cannot be sold short û a fact which added to the feeling that the conversion premium was on the aggressive side.
Tranche A assumed a credit spread of 230 basis points over US Libor, which gave a bond floor of 93% and an implied volatility of 28.5%. Tranche B used a credit spread of 250 basis points, a bond floor of 92.5% and an implied vol of 28%, which was slightly below the 10-day historic vol of 29% and in between the 30-day vol at 25% and the 100-day at just above 33%.
Citigroup provided $25 million worth of credit bid for tranche A and $50 million for tranche B.
The stock has struggled after falling from a 2006 high of S$1.07 in late April to a low of S$0.65 on August 10, and has traded mainly sideways over the past few weeks û a pattern not too dissimilar from that experienced by STATS ChipPAC. It fell one cent to S$0.72 yesterday after issuing the CBs, which leaves it with an 18% gain over the past 12 months, but 13.2% below its IPO price from February 2004.
The bonds traded up to 100.5-100.875.