"This sends an extremely positive signal to the Taiwanese market," one Asian syndicate head comments. "These are the first two big transactions from the country to dip their toes in the water this year and they found it pretty warm."
Underpinning each deal's success has been a marked supply/demand imbalance, fuelled regionally by a spike in redemptions and globally by strong investor demand for equity-linked product. In Asia, it has also been Taiwan which has seen the greatest number of redemptions, with a $85 million issue for Orient Semiconductor expiring and three rolling put structures launched early last year for Acer Inc ($260 million), Delta Electronics ($200 million) and Far Eastern Textile ($130 million), all put back by investors.
And as one industry specialist explains: "While IPOs have hit their lowest ebb for 21 years in the US, convertibles are on a roll, accounting for 50% of all issuance so far this year. CB funds alone are said to have about $400 billion to invest and dedicated hedge funds are particularly flush with cash, having had a fabulous year during 2000, outperforming the entire hedge fund community."
Where Taiwan is concerned, bankers also report that the recent upswing of the TWSE has led investors to move back from an underweight to neutral position. "Accounts want to participate in the upside," says one observer. "But given what happened last year and the continuing political uncertainty, they also want the kind of protection that a convertible best offers."
ACER
"Last year we were keen to do a GDR offering but found that the market just wasn't there," says Acer Communications CFO Eric Yu. "Then in December, we decided it would make more sense to do a convertible and chose Salomon Smith Barney above other relationship banks which submitted pricing because we liked their structure best."
Unlike most other Taiwanese CBs which have tended to either comprise five-year maturities with three-year calls and puts, or more recently, annual puttable structures, the $175 million deal has two-year calls and puts. Priced Wednesday at par with par redemption, the five-year offering carries a zero coupon and a conversion premium of 25% to both spot (NT$44.50) and a five-day closing average to February 13 when terms were finalized with management (NT$44.56). The deal also incorporates a downward adjustment of the initial conversion price in years two, three and four with an 80% floor.
Puttable in year two at 108% and thereafter at par, the deal also has a two-year call subject to a 130% trigger. Co-leads are ING Barings and Nomura, with CDIB and Capital Securities as co-managers.
Bankers report that the deal has a typical geographical split for the sector, with about 70% of demand generated from Europe, 20% from the US and the remainder from Asia. It was also said to have attracted a handful of equity players that wouldn't normally be associated with a Taiwanese CB.
Yu comments that the company is particularly keen to see conversion. "We also chose a two-year structure because we don't really have any more room on our balance sheet for a one-year deal," he adds. "Ideally, this is what we would have preferred because a one-year deal classifies as a current liability for accounting purposes, whereas as a two-year constitutes long-term debt.
"This deal will refinance a domestic zero coupon annual puttable deal we launched last year and is likely to come due in June. We found the idea of paying 4% per annum plus fees very attractive when you consider that straight dollar debt, or even straight domestic debt, would amount to more than 6% per annum."
Convertible specialists also applaud a deal, which a number describe as a natural evolution of the rolling put structure so prevalent last year. As one puts it: "The traditional three-year deal from Taiwan would make a pretty ugly proposition at the moment because credit spreads have moved out as a result of problems in the banking sector. Acer is one of Taiwan's top companies and yet who would have thought that it would have to pay upwards of 300bp over Libor for three-year money. A couple of years, it would have been unthinkable.
"A two-year deal represents a good compromise," the specialist concludes. "At least it gives the company some time to put the money to work, even though it does mean that there is an accretion charge that will need to be reported on the balance sheet."
The computer peripheral manufacturer's deal also stands out because it has achieved the highest conversion premium in over two years. Hon Hai stands marginally behind on a 23% premium, while Delta Electronics sits at the other end of the spectrum on a 3% premium. Some bankers, however, argue it has only been attainable on the back of the highly defensive re-fixes, a structural twist not often seen in blue chip deals.
"We think it's a very worrying signal," one argues. "It can end up being highly dilutive for the company in question, because investors don't often know how to value re-fixes within the option premium and simply write them down to zero. The issuer is, therefore, accorded no pricing benefit whatsoever."
Lead bankers, on the other hand, counter that the terms have been misread. "There is no re-fix in either year one or year two and hence no protection at all," an official explains. "It's simply been put in as an added sweetener for investors that stay in the deal beyond the first put."
Like most Taiwanese CBs, the transaction also has a high bond floor of 92.6 based on an underlying credit assumption of 250bp over Libor and fair value of 107. Implied volatility equates to 23.5% and historic volatility 60%.
Fu concludes that the company is highly satisfied. "We think the lead did a very good job," he remarks. "The whole deal was put together in the space of just one month and we didn't end up having to do a roadshow at all. Come launch, the deal was completed within the space of 10 hours and more importantly, within the parameters originally agreed. It was a very satisfactory result for us and we are very proud to have achieved the highest ever premium in recent memory."
Despite the global downturn in PC demand, ACM remains favoured by analysts because it is capturing market share as a manufacturer of mobile phones. Fu predicts that the company will increase its global position this year from about 1% of the overall market to about 2% to 3%. "Last year we shipped 4.6 million units and although we haven't officially announced our forecasts for 2001 yet, we think that this year we should achieve 100% growth levels," he concludes.
As a percentage of sales, it is also believed that mobile phones could account for up to 37% compared to 25% last year. "We believe the stock will outperform," says Teresa Chen of Deutsche Securities Taipei. "Shipments are weaker than expected, but this is balanced by the fact that companies such as Motorola, Ericsson and Nokia are all starting to outsource production much more heavily."
QUANTA
A $200 million convertible for Taiwan's largest notebook manufacturer Quanta Computer proved equally popular with global investors. Launched Tuesday, hours before ACM, the rolling put deal was led by UBS Warburg, one of the most consistent lead managers of Taiwanese equity-linked offerings.
Priced at par and redeemable at par, the five-year issue has no coupon, no yield and a conversion premium of 16% to spot, or 23% to a five-day average. Non-callable for three years and thereafter subject to the 130% trigger, it is also puttable in December 2001 at par.
The exceptionally short put raised a number of eyebrows among Asian convertible specialists, none of whom claimed to have ever seen one fall due after only nine months before. "It strikes me as rather bizarre," one specialist states, summing up the general mood. "But since many Taiwanese companies view these transactions as cheap working capital, three more months doesn't make that much difference in the scheme of things."
Underlying assumptions include a bond floor of 94.1 based on a credit spread of 270bp over Libor and theoretical value of 103. Historic volatility is said to stand around the high 40% mark and implied volatility at 30%.
"What attracted investors was the extremely high bond floor and the company's exceptionally strong balance sheet," one observer reports. "This is a company with very little leverage and good growth prospects despite declining PC demand. As Taiwan's largest notebook manufacturer, Quanta is well positioned to benefit from companies like Dell outsourcing production."
Indeed, the company recently acquired Compaq as a major customer and analysts believe that this will help lead to, roughly, a 38% increase in notebook shipments during 2001. "It's good to see the company expand and diversify its customer base," Deutsche's Chen comments. "However, we do think the share price is a little toppy at the moment. Quanta is trading on a P/E ratio of 19 times 2001 earnings and we think 15 times would be more appropriate."
For the 175 investors that rapidly filled the book, the deal's risk/reward profile was said to be a good fit. "This stock is fairly unhedgeable, but for those hedge funds that did participate, the transaction sits nicely in their portfolios because they can run it as a long position," one banker comments.
Outright convertible funds were said to comprise the main buyers, with some hedge fund interest and a small number of fixed income funds. "We launched the deal at 7am London time on Tuesday and within 40 minutes knew that we had a strong deal," the banker continues. "We ran the books until 10.30am, before closing and then re-opening them again just as New York opened. The book finally closed at 8am New York time just under 10 times subscribed."
For both Acer and Quanta, initial secondary market trading levels would seem to affirm primary pricing. Together, they have hovered between par and 100.75 in the one to two days since launch. Asian ECM bankers conclude that they offer a strong platform to deliver more of an every increasing pipeline. Next off the blocks is likely to be Yageo Computers, which is said to be pre-marketing a $250 million convertible, again via Salomon Smith Barney.
