With Citibank Taipei as lead manager, Chunghwa Picture Tubes (CPT) has offered investors an enormously cheap volatility play.
Priced at the tight end of indicative terms, the deal has a five-year final maturity and zero coupon with a par redemption structure. The conversion premium has been set at 12.2% to the stock's NT$40.2 close (Thursday), against an indicative range of 7% to 13%, with a two-year call subject to a 130% hurdle and two-year put at 109% to yield 4.4%. There is also an annual re-fix subject to an 80% floor.
The underlying valuation comprises a bond floor of 94.5%, theoretical value of 120% and implied volatility of 18%. This is based on a credit spread of 340bp over Libor, a zero dividend yield, 4% cost of stock borrow and volatility assumption of 60%. Historic volatility is also 60%.
On the same day that the deal priced, CPT called its existing $85 million convertible issued at the very beginning of February 2001. This also had a five-year maturity, 0.5% coupon, 8% conversion premium, par redemption and three-year put to yield 75bp over Treasuries.
What distinguishes the old deal from the new is the short six-month call option attached to the former offering, which was inserted because the company believed its share price was set to re-bound quickly from a then trading price of about NT$17. Over the course of 2001, however, it subsequently slid to a low of NT$5.83 on September 24, before a meteoric sevenfold climb over the past four months to a current level of NT$40.4 (Friday's close).
Bankers say that the new deal appealed heavily to hedge funds, which took up roughly half the book. There was also a geographical split of 60% Asia, 40% Europe.
