Taiwan’s Far Eastern International Bank last night joined the growing number of issuers accessing the convertible bond market when it raised $150 million from a zero-coupon deal. This was another aggressively priced deal and, in fact, the first one this year to price away from the cheap end.
The fact that the issuer is based in Taiwan and the deal therefore came with plenty of asset swaps clearly helped in terms of the pricing, but the fact that the CB has a BBB- rating from Fitch and the backing of the Far Eastern group also boosted the interest from outright investors. On top of that, the deal offered exposure to the Taiwan banking sector, which CB investors aren’t exactly spoilt with.
Cathay Financial Group issued a $254 million two-year CB in August last year, but it focuses more on insurance than on pure retail and corporate banking, which is the main business of Far Eastern International. The latter is viewed as a closer proxy to the overall economy, argued one source.
The deal has a five-year maturity and a slightly shorter-than-normal put date of two-and-a-half years. This also helped support the price as a shorter put option does result in a higher bond floor and therefore also increased leverage on the asset swaps. The issuer call also kicks in after two-and-a-half years, after which it is subject to a 130% hurdle.
The bonds came with a fixed zero percent coupon, but were marketed with a yield-to-put between 0% and 0.75% and a conversion premium of 25% to 30% over yesterday’s close of NT$11.95. Both terms were fixed at the mid-point for a 0.375% yield and a 27.5% conversion premium.
According to sources, the deal was about five times covered at the investor-friendly end and as much as three times covered across the range, but the issuer chose not to push the terms beyond the mid-point and risk squeezing the market too much. One source noted that the Far Eastern group is a frequent issuer in the capital markets through entities like Asia Cement and textile manufacturer Far Eastern New Century, and would have wanted to keep investors happy by ensuring that the bonds trade well.
And at NT$15.24, the conversion price is already pretty steep. The deal came as Far East International’s share price was trading near its 12-month high from early February last year. And perhaps more importantly, this is the third time in 12 months that the share price has reached the NT$12 level and each time so far it has failed to break through that.
In February last year, the stock hit a high of NT$12.0562 before changing course. It then fell to as low as NT$9.9203 in early June before starting to recover. In mid-September it was again close to NT$12, this time reaching a high of NT$11.9138 before retreating to a low of NT$10.55 some five weeks later. It remains to be seen whether it will be able to break higher on a sustainable basis this time.
Sources say the bank has been looking to issue a CB for at least two years, but each time the share price has reached a level that the management was happy with, the CB market hasn’t been particularly supportive and vice versa. Finally, both these factors seem to be aligned: the appetite for CBs is strong, as shown by a number of other deals so far this year, and the share price has gained 2.6% this week to a new 2013 high, which puts it just NT$0.10 below its 52-week high from a year ago.
The bank said it will use the proceeds to enhance its operating capital and one source added that it is also wanted to boost its US dollar funding.
Despite the fact that the deal was quite small in dollar terms and was open for only a couple of hours, it received orders from as many as 70 investors. The majority of the demand came from hedge funds, although that may have been partly due to the fact that their orders were somewhat inflated. In any case, sources said that about 70% of the CB was allocated to outright funds.
As a result, less than half of the $100 million worth of asset swaps that had been sourced by the bookrunners were taken up.
The CB was marketed at a credit spread of 200bp, full dividend protection and a stock borrow cost of 4%. Sources said there is some stock borrow available in the market, but it is expensive. And since the stock trades only about $1 million a day, it will be difficult to put on an efficient hedge of the equity option.
The final terms resulted in a bond floor of 94.8% and an implied volatility of 25%, making this the most expensive CB so far this year in volatility terms. Far East International has a 90-day historic volatility of 16.5% and a 260-day vol of about 20%.
Like with other deals so far this year, the aggressive terms didn’t deter investors though and sources said the bonds were changing hands in the grey market at 100.375 to 100.875 last night.
Goldman Sachs was the sole global coordinator for the transaction, while Citi and Deutsche Bank were joint bookrunners.
