It took about a week of intense negotiations and positioning, but yesterday afternoon Wistron Corp’s long-awaited convertible bond finally hit the market, making it the first Asian CB in 2012.
The deal has shrunk significantly from the $550 million transaction that the company was targeting when it made the initial filing some six months ago (although Wistron has re-filed for a smaller $300 million deal since then) as market conditions have deteriorated and banks were unwilling to provided enough asset swaps to cover a bigger transaction. It turned out to be crucial to have enough swaps in place to cover the base deal as investors are currently not willing to look at a deal otherwise. And that is the case even for outright investors who typically don’t want asset swaps themselves. However, they worry that if the hedge funds don’t get as much swaps as they want, it will have a negative impact on the demand and will result in a poor performance in the secondary market.
The company also offered a back-ended yield, which may have helped to appease some investors who were not keen on the zero coupon.
But Wistron, which designs and manufactures laptops, LCD TVs, handheld devices and other products for a range of global brands, was able to raise $180 million and did get the deal done before the presidential election tomorrow. The election is looking to be a close race between sitting president Ma Ying-jeou of the Kuomintang party, also referred to as the Nationalist Party, and Democratic Progressive Party chairwoman Tsai Ing-wen and the company had been trying to get the deal done beforehand to avoid any potential market volatility and uncertainty in the wake of the poll.
Wistron also beat smaller Taiwanese competitor Pegatron Corp to the market, and as a result may have managed to capture some of the investors who were initially considering investing in that company instead. Pegatron too has been trying to put together a three-year deal of up to $300 million since last week and initially it looked as if both companies would hit the market at the same time.
Wistron’s offering comprised a base deal of $150 million, an upsize option of $50 million and a greenshoe of $100 million that can be exercised before February 2. At two-thirds of the base deal, the shoe was unusually large and suggests that the company really would have liked to raise $300 million. As $30 million of the upsize option was exercised in connection with the pricing, the company can now raise up to $280 million if the greenshoe is exercised in full. The money will be used to buy raw materials overseas.
However, sources noted that the potential to increase the size by that much did cause some concern among investors who worried that there wouldn’t be enough asset swaps to support an upsize and that this could result in a poor aftermarket performance. According to bankers involved in the deal there was enough asset swaps to cover marginally more than 100% of the base deal, but one source said not all of that was used as there was decent demand for the bonds from outright investors.
Another source added that there is also some expectation that there will be more asset swaps available in the market next week as some domestic banks are holding off to see how the issue is trading in the secondary market first. The arrangers will exercise the shoe only if those swaps do materialise. If they don’t then the deal will be kept at $180 million.
Another issue was the availability of stock borrow as the Taiwanese government has been advising stock lenders in the past few months not to lend as freely in order to limit the volatility in the market. However, one CB banker noted that this is having an impact mainly on the onshore lending market, while international CB investors tend to prefer to borrow from offshore lenders. That said, while there was some limited borrow available in the market, it was quite expensive. The leads were using a 5% stock borrow cost in their models.
The three-year CB was offered with a fixed zero percent coupon, a yield between 1% and 1.5% and a conversion premium of 20% to 25% over the five-day closing average of NT$41.08. The yield and the premium were both fixed at the investor friendly end, resulting in a 1.5% yield and a 20% premium. This was no surprise since the company was expected to be more focused on the deal size than the price. The stock finished at NT$41.15 yesterday so the premium versus the latest close was marginally lower at 19.8%.
As the bonds have a three-year maturity, there is no put option. However, there is an issuer call after 18 months, subject to a hurdle of 120%.
Despite the various concerns, sources said the demand was good and the order book was pretty well balanced between hedge funds and outright investors. European investors bought the majority of the deal. The deal closed at 8pm Hong Kong time and was not offered to onshore US investors.
The CB initially fell below par in the grey market — one market watcher said it was bid at 99 5/8 a couple of hours into the bookbuilding — but after pricing it moved back up to par, suggesting a certain amount of relief that the first deal of the year appeared to have gone well.
The asset swaps were offered at Libor plus 285 to 300bp and the bonds also came with a full adjustment for cash dividends. At the final terms this gave a bond floor of 93.4% and an implied volatility of about 24.8%, which compares with a 100-day historic vol of just over 41%. If you include a 4% stock slippage the implied vol would rise to about 30%, but one source noted that the stock may not take that big a hit, as the limited stock borrow should reduce the short-selling activity.
Numerous banks have been associated with the deal since the initial filing six months ago and at one point there was talk of as many as 11 bookrunners. That number had come down somewhat on the final ticket and in the end it was the three global coordinators — DBS, Deutsche Bank and UBS — that drove the deal. However, Bank of America Merrill Lynch, Barclays Capital, Citi and Standard Chartered were listed as joint bookrunners.