The steady stream of issuance from Taiwan continued apace last night (Thursday), even though the recent tech rally is showing signs of bursting. With Goldman Sachs as lead manager, Delta Electronics priced a $185 million convertible bond with a zero coupon, negative yield structure.
The five-year deal redeems at 94.63% and has a two year put at 97.8% to give a negative yield of minus 1.1%. The deal is callable at three years subject to a 125% hurdle. There is also a $15 million greenshoe.
The conversion premium came at the wider end of a pre-marketed range between 25% and 30% to settle at 25% over the stock's closing price of NT$44. But observers say the actual premium is somewhat lower than this level because of cash dividend protection for investors at 2.5% and above.
Underlying assumptions comprise a bond floor of 92.5%, theoretical value of 102% and implied volatility of 35.4%. This is based on a credit spread of 125bp over Libor, 600bp borrow cost and 40% volatility assumption.
One of the most notable features of the deal is its low bond floor, underlining investors' willingness to pay up for the equity option again. The transaction was also pitched slightly differently to recent equity-linked offerings, which are said to have had a much stronger local flavour and weaker dividend protection.
Dividend protection on the UMC/AU Optronics exchangeable, for example, was said to have been set at 6.7% and at 5% for Quanta Computer. As one specialist comments, "This deal was launched slightly later in the day than some of its predecessors, which had a heavier allocation to Taiwan retail. With Delta, international investors were really attracted by the in-the-money dividend protection. It's what arbitrage investors really liked about the deal and what they're becoming increasingly focused on."
With books closing a couple of times covered, a total of 45 investors participated. By geography, the deal was allocated 50% Europe, 30% offshore US and 20% Asia.
There was said to have been almost no demand tied to asset-swap, but a healthy number of long accounts, the usual array of hedge funds and from Asia, a core group of fixed income investors that liked a credit, which has the strong financial ratios of a UMC or Compal Electronics, but pays a slightly higher spread.
Delta is the world's leading computer switching power supply manufacturer and a major vendor of electronics components. Year-to-date, the stock is up 13.79% and analysts believe it is fairly valued.
CSFB said in a recent research report that it believes, "the stock has a balanced risk/reward profile and is likely to trade in a range of NT$45 to NT$53."
And it added, "We continue to like its business model emphasizing ROE instead of chasing revenue at the expense of margins, or to carry the working capital burden for clients."
Bankers wonder whether the deal marks a turning point after a few days intense issuance activity. The TWSE fell 1.4% yesterday as investors moved back out of tech stocks following disappointing earnings from Yahoo.
