India has completely dominated CB issuance so far this year with about 75% of the market, with Hong Kong making up a large percentage of the rest. Consequently, there is a certain amount of scarcity or diversification value attached to an issuer from anywhere else.
In addition, Winbond itself is also a rare issuer because of its prudent financing strategy. This, together with signs of improving sales, added further to the buying interest and helped offset a view by some observers that the bond terms, which included the highest conversion premium for a Taiwan CB in 18 months, were expensive.
The bonds, which were brought to market by Goldman Sachs, have a five-year maturity, but investors can put them back to the issuer after two years. The bonds have a zero coupon and there is an issuer call after two years, subject to a 125% hurdle.
The bonds were launched in the early afternoon on Wednesday (May 10) after the Taiwan market closed and offered to investors at a conversion premium range of 20% to 25% over the latest market price of NT$10.95. They were priced at the high end after the books had been open for less than one hour, according to a source. At that time the deal was already multiple times subscribed and the bookrunner saw no reason to continue the marketing.
The strong demand allowed Goldman Sachs to immediately exercise the $20 million greenshoe, increasing the original $100 million offering by 20%.
Given the time of the transaction, about 85% of the demand came from Asia while Europe accounted for the remaining 15%. The bondÆs werenÆt offered to US investors.
The issue was marketed to investors at a credit spread of 185 basis point over Libor to give a bond floor of 86.8% - the lowest ever bond value for a 25% premium CB, according to one industry specialist.
Still, taking into account the two-year put option the bond floor equaled an option value of 6.9 points per year, which compared with 10 points per year on an outstanding convertible issued by Compal Electronics and 9 points on a CB issued by Quanta Computer.
The implied volatility came out at 35% which was a premium to the historic volatility of 32%, again underscoring that investors were comfortable with the equity story and willing to pay a bit more for it.
One banking source not connected to the deal says part of the reason for the issue's success was the fact that the company had been able to secure a lot of stock borrow which allowed hedge funds to go short on the stock while staying long on the conversion option.
The bond sale was initially planned for December last year but was delayed due to some undisclosed regulatory issues. In the meantime, the share price has been on a upward trend which made the sale slightly more challenging. From a trough in late October, the share price has risen 48.4%. It added 0.5% to NT$11 yesterday in the wake of the CB sale.
However, the companyÆs business performance has also improved in recent months with sales data for April published earlier this week showing a 12.2% improvement over March and a 23.6% gain from April last year to NT$2.36 billion ($75.3 million). Winbond attributed the growth to an increased contribution from the memory segment amid ramping capacity at its new 12-inch fabrication plant in Taichung.
The company, which has reported losses in four of the past five years, has said it is ôcautiously optimisticö about 2006 given its increased capacity and expectations that the overall chip industry will continue to grow. Its first quarter earnings showed a positive bottom line.
Proceeds from the bonds, will be used to repay bank loans and for the buying of raw materials overseas, the company said in a statement yesterday.
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