YTL powers along in flat market

YTL Power completes a rare convertible from Malaysia as CMC Magnetics is reported to be gearing up for the next in an unending stream of deals from Taiwan.

A $126 million convertible for the IPP (independent power producer) was priced yesterday at the outer end of terms by joint leads Credit Suisse First Boston and Deutsche Bank.

The five-year premium redemption deal came on a coupon of 2.5%, a conversion premium of 16% and a yield-to-maturity of 6.73% equating to 200bp over Treasuries. This compared to an indicative range of a 2% to 2.5% coupon, 16% to 22% conversion premium and yield-to-maturity of 6.10% to 6.60%.

With a $25 million greenshoe, the deal is also callable after year two, subject to a 120% trigger and has premium redemption in year five at 124.86% against an indicative 120% to 127.06%. There is no put option, but the transaction does have a downward re-set in years two and four, subject to a 90% floor.

Underlying terms comprise a bond floor of 96%, fair value of 106%, implied volatility of 14% and a credit level of 180bp over Libor.

Observers report that books were about two times oversubscribed, with a geographical split of Europe 55%, Asia 25% and US 20%. Just under 50 investors were said to have participated in total, with a 75%/25% split between convertible and fixed income funds. There was also said to be a smattering of equity accounts, but very little participation from hedge funds since the stock is almost impossible to short.

For the leads, the deal is likely to be considered a success in the face of difficult market conditions for equity-linked paper. As one banker comments, “Three deals have been pulled in the US over the past few weeks and what’s now become known as 'Le Farce' in Europe, following a disastrous deal by Lafarge, has had a terrible impact on market psychology. Investors are being super cautious.”

A second further adds, “Market conditions are tough and convertible funds have been crushed by volatility over the past month or so. The market has come off five volatility points since April, dropping from 36% to 32%.”

Given the backdrop, some might ask why YTL Power decided to forge ahead, particularly when the company is cash rich and in no obvious need of funding. The answer is two-fold, as one observer explains.

“Firstly, US Treasuries are at 20 to 30 year lows and if the company decided to wait, the earliest it would have been able to go would be September. Who knows what the situation will be then?

“Secondly,” he adds, “the company has indicated that it wants to raise funds for overseas projects including the possible purchase of one or more of the three Singapore power generation companies to be sold by Temasek.”

Market conditions aside, YTL Power represents the first true international equity deal from Malaysia this year, following a largely domestic offering by Time.com. With the country’s stock market largely off most investors’ radar map, the deal was tilted towards fixed income investors that have been lapping up the country’s paper in the credit markets.

“This deal had great appeal to fixed income accounts,” one observer concludes. “It has the winning combination of investment grade rating, coupon and yield.”

Next in line is said to be a $150 million to $200 million convertible by CMC Magnetics of Taiwan, which is scheduled for launch next week. Similar to an offering in 2000, Lehman Brothers is said to be lead manager.