Following an accelerated five-hour bookbuild, lead manager JPMorgan completed a $120 million convertible for the world's largest CDR manufacturer on Friday. Having watched the market all week, a decision was taken to launch the deal on the back of rising stockmarkets in Asia and Europe, with books closing 2.8 times covered.
CMC has been a regular visitor to the convertible market over the past four years, launching a total of three deals, all of which were led by Lehman Brothers. Bankers say name familiarity and a trackrecord of secondary market performance were both important in helping the BB- rated deal, which breaks the mould of recent transactions by offering investors a little bit of yield.
Terms comprise a five-year maturity with a zero coupon and par redemption structure. The conversion premium came towards the bottom end of a 10% to 15% range, falling at 11% to a volume weighted average close of NT$17.179. There are two put options; the first after one year at 100.5% and the second after two at 101.004%, giving a yield-to-put of 0.5%. There is also a two-year call with a 125% hurdle, $15 million greenshoe and a downward annual re-set subject to an 80% floor.
Underlying assumptions comprise a bond floor of 95.6%, theoretical value of roughly 106% and implied volatility of 20%. This is based on a credit spread assumption of 350bp, zero dividend yield, zero stock borrow and 35% volatility assumption.
Observers report a small but highly sensitive credit bid, neither of which is very surprising given the credit's high level of spread volatility over the past year and diminished appetite because of its previous convertibles, the last of which was launched in March 2002. About a third of the book was allocated to asset swap demand and there is said to have been no credit subsidy.
The group's outstanding 0% February 2007 deal was being quoted by rival banks at 375bp bid on Friday and has a first put which also falls due in 2004. At 107.75% bid, the deal currently has a 24.26% conversion premium, bond floor of 104.86% and implied volatility of 29.66%. At the time of launch, what was then a two-year credit bid, came at 400bp to 425bp over Libor.
Bankers say that spreads hit a high of 700bp over last autumn when the group was downgraded from BBB+ to BBB by Taiwan Ratings largely because of falling spot prices. Since the beginning of this year, signs of price stability have led the stock to outperform both the TWSE and electronics index, with CMC up 23% compared to a 3% rise in both the overall index and electronics index.
A total of 44 investors participated with a geographical breakdown heavily weighted towards Europe, which accounted for 85% of allocations compared to 15% in Asia.
Taiwan Ratings says that the "highly competitive and volatile nature of the optical storage media industry and company's aggressive financial profile," are its main credit weaknesses. Balancing this, it also cites its, "leading market position in the CDR sector and above-average technology base compared with its peer group."
According to the agency, CMC intends to improve its financial flexibility by divesting part of its investment portfolio and generating positive free cash flow in 2003. This means that it should be able to bring debt to capitalization down from 40% to 31% over the course of the year.
"The company maintains adequate financial flexibility," it concludes. "Aside from sizeable cash and short-term investments on hand, CMC enjoys plentiful credit lines. In addition, the company has adopted a hedging policy to avoid risks associated with foreign exchange rates."
