Joint leads Credit Suisse First Boston and ING launched a $125 million convertible yesterday (Tuesday) with pricing expected later today. Indicative terms for the five-year deal are a zero coupon, zero yield and par redemption structure with a conversion premium of 9% to 14%. The deal has annual puts at par and a two-year call subject to a 130% hurdle.
There are also two re-set options. The first is an annual re-fix subject to an 80% floor and the second a special re-fix at the option of the company prior to each put date. This will be either the higher of 90.1% of the market price, or 80% of par value.
The leads are said to be marketing the deal based on a credit spread of about 375bp over Libor. This assumes a valuation giving a bond floor of roughly 94.86%, theoretical value of 110.9% to 109.1% and implied volatility of 12.4% to 14.6%. This is based on a 35% volatility assumption, zero dividend yield and 6% cost of borrow.
The nearest comparable is a $150 million convertible for fellow TFT-LCD manufacturer Quanta Display (QDI), which was priced at the end of January by Lehman Brothers. And while some believe QDI is a weaker credit on a fundamentals basis, the halo effect of the Quanta group and a degree of credit subsidy allowed QDI to be priced at a much tighter 250bp credit spread, which in turn made the bond floor more defensive at 96%.
With a similar zero coupon, zero yield, par redemption structure to Hannstar, QDI was priced with a 19% conversion premium, annual puts and a two-year call subject to a 125% hurdle. It also had two re-set options: one with an 80% floor like Hannstar and one that only kicks in if QDI proceeds with a new share GDR issue. At this point, the conversion price is automatically re-set to the DR price plus 19% conversion premium. Hannstar is also planning a $200 million GDR issue with CSFB and ING again as joint leads.
Hannstar, by contrast, has gone out with a much lower conversion premium and the stock is also pretty much flat on the year, closing yesterday at NT$10.65, up 2.90% on the year. It hit a high of NT$38.3 in April last year and a low of NT$9.1 in December.
Analysts say it is currently trading on a price to book valuation of 1.1 times 2003 earnings, below its 1.8 times historic average. It also trades below other TFT LCD manufacturers because its return on equity and assets are below the sector average and new capacity from the 5G fab will not come on stream until March 2004.
Commenting on the indicative terms, one convertible specialist says, "If these terms had hit the market at the end of last year, we'd have all fallen off our chairs laughing. But the market has a better smell to it at the moment because there's so little new supply."
There also seems less likelihood of much more additional convertible paper from the TFT-LCD sector, as Chi Mei Optoelectronics, the last of the Taiwanese manufacturers to complete an international deal, has dropped plans to do an equity-linked offering. However, the company and its lead manager Morgan Stanley are still said to be evaluating market conditions before deciding whether to commit to pre-marketing for an ADR issue.
So too, while analysts are still fairly negative on the outlook for the TFT LCD sector, there small signs of improvement with Taiwanese producers in the process of raising 15" and 17" panel prices by $5 to $185 and $275 respectively.
Investors say Hannstar is being marketed as a BB- to B+ credit. With total debt amounting to NT$18 billion ($507 million), it currently runs a debt to EBITDA ratio of 2.62 times.
In order to complete phase one of its 5G fab and a colour filter production facility costing approximately NT$22 billion ($630 million), the company has heavy capex plans this year. However, funding is now said to be in place thanks to two recent rights issues, which have left the company with NT$14 billion ($404 million) in cash and equivalents on its books. It also has undrawn short-term credit lines of $140 million and signed an NT$12.5 billion syndicated loan in October.
But analysts estimate that gearing will still increase slightly this year, as cash flow from operations is unlikely to meet both its capex and debt obligations.
