A $300 million convertible for Taiwan's Hon Hai Precision and a $200 million convertible for Samsung Electronics of Korea mark the first two major international equity transactions from Asia this month and add to a growing stockpile of deals from the sector. Since Hutchison Whampoa launched its landmark $3 billion exchangeable in mid-September, the equity-linked market seems to have found its feet for the first time since the Asian crisis, with four of last month's nine major international equity transactions also comprising convertible deals.
Samsung and Hon Hai have both been brought to market under accelerated launch schedules, with the former priced within five hours of marketing on Tuesday and the latter scheduled to close tonight (Wednesday) after a one-day bookbuild. Both are not surprisingly said to have been significantly oversubscribed.
Of the two, Samsung was completely unexpected and appeared from nowhere under the lead of Morgan Stanley Dean Witter. The transaction was also highly unusual in being a secondary market convertible that had originally been privately placed with Dell Computer in October 1999 as part of a supply contract with Samsung Electronics. At the time, Morgan Stanley acted as advisor to the US company, but did not structure the deal, which has now returned to the public markets after a one year lock up.
Priced at 101.65%, the January 2003 transaction has an annual coupon of 2%, a 34.85% premium to a GDS reference price of $80.125 (Tuesday's close) and a yield to maturity of 5.72%, equating to roughly 30bp through US Treasuries. The deal is non-callable for life and has a redemption price of 110.449%.
Both the coupon and the conversion price were fixed last October, with the lead's manoeuverability consequently deriving from the issue price. Marketed under a 99.65 to 101.65 indicative range, pricing came at the tight end after books closed 11 times oversubscribed.
Underlying assumptions for the fixed income component comprise a bond floor of 95 based on an implied credit spread of 250bp over Libor. Where the equity component is concerned, the lead priced the deal on an implied volatility of 30% and dividend yield of 1.5% to give an option value of 6.65%.
On an implied volatility of 40%, however, the option value jumps to 10%, giving the transaction a theoretical value of 105. At today's close of trading in Asia, this is where the transaction was being quoted - 104.625/105.125 - having jumped from a launch price of 101.65 to a high of 108.
Bankers comment that over 150 investors were represented in the order book, with about 70% hailing from Europe and the balance dividing equally between the US and Asia. By investor type, outright convertible buyers were given preferential treatment, although there was also said to be a strong showing from both fixed income and equity investors.
Fixed income accounts are said to have been attracted by the transaction's high bond value and Samsung's solid investment grade rating, which stands one notch below the sovereign ceiling at BBB-/Baa3. The company also has a number of outstanding dollar-denominated debt deals to facilitate benchmarking.
In particular, Samsung has a 9.75% May 2003 fixed rate bond, currently trading at a bid/offer spread of 240bp/225bp. It also has two outstanding convertibles, comprising a $150 million December 2006 and a $300 million December 2007.
Both issues have little appeal for fixed income investors, however, since they are highly equity sensitive, with correspondingly little yield. The zero coupon 2007, for example, is currently trading at a zero yield-to-maturity and a conversion premium of 8.15%. Callable and puttable in 2002, it has a parity price of 107.95 and is presently quoted at 130/132.
Samsung Electronic's bonds were among the star performers of Asia's fixed income universe during 1999 in a reflection of the company's genuine de-leveraging efforts. Between mid 1998 and mid 1999, for instance, interest coverage ratios increased to 11.3 times EBITDA and have improved again over the past year to 25 times.
This has resulted in a halving of Samsung's trading premium to both the sovereign and proxy sovereign issuers such as the Korea Electric Power Corporation (Kepco). Against the Republic's 2003 bond, the company is now being quoted at a 70bp premium and against Kepco's December 2003 bond, a 25bp premium.
In the equity markets, the company has had a more volatile ride, with its share price down 35.9% year to date. Having hit a high of W394,000 ($374.59) in July, it closed Wednesday at W170,500. Bankers, therefore, comment that one of the chief appeals of the convertible for equity investors lies in its defensive characteristics.
"When the original deal was launched it had a conversion premium of about 29%," one banker explains. "Since then, however, we have seen huge rallies in the stock during the fourth quarter of '99 and first quarter of 2000, then a bumpy ride down to current levels which are almost back in line to where the original deal was priced."
Hon Hai in a day
After two weeks of rumoured pre-marketing, lead manager Goldman Sachs has launched a $300 million convertible for Taiwan's fourth largest company by market capitalisation. Initially it was thought that a $300 million convertible for computer peripheral manufacturer Hon Hai Precision would close tomorrow (Thursday), but pricing has been bought forward on the back of strong demand.
Similar to a deal for Compal Electronics which preceded it, the five year transaction employs Goldman's proprietary Stock Indexed Zero Coupon Securities (SIZeS) structure. Backed by a zero coupon and zero yield-to-maturity, the issue has an indicative conversion premium of 18% to 23% and three year hard no call, thereafter subject to a 140% trigger. The issue is also puttable at par every year.
Bankers say that the deal has a bond floor in the low 90s based on credit spread assumptions at 200bp over Libor. Where the equity option is concerned, the deal is being marketed on an implied volatility range of 25% to 30%. Theoretical value is said to stand at about 104 to 105.
By the close of Asian trading, the deal was already being quoted in the grey market at 101/102, with bankers commenting that demand had been particularly strong from Europe.
The deal has also benefited from Compal's trading record, with the $130 million convertible currently bid at a 2% premium to parity. The notebook manufacturer's offering had initially performed badly, dropping below its par issue price to 97/98 within a day or two of pricing on October 12. Since then, however, it has risen in tandem with the underlying stock, which has appreciated from about NT$40 ($1.25) on October 5 to NT$59.5 at today's close.
Says one banker, "Earlier this year investors saw that the SIZeS structure performed on the downside, with existing transactions able to hold their bond floors. With Compal, they've seen that it performs in an improving market and have captured 70% of the upside."
Where Hon Hai is concerned, the combination of a more highly regarded company and strengthening equity market has encouraged Goldman to use more aggressive terms. Thus, while Compal was priced on a conversion premium of 17%, at the top end of a 12% to 17% range, Hon Hai starts its range at an 18% premium.
The underlying stock has had a strong run recently, rising from a low of NT$157 on October 4 to a current price of NT$210. But, analysts still forecast further strengthening. In a research report published this week, Credit Suisse First Boston assigned a target price of NT$260. It also stated that the company should see EPS grow 39% over the course of 2001 to NT$9.70 as it wins more orders from US computer companies such as Apple.
Overall, the Taiwanese market has risen 7% over the past two days, with strong buying interest reported from foreign institutions. And as one banker concludes, "Buying has been selective and primarily directed towards large, liquid, well-known stocks such as Hon Hai. It gives the convertible a good foundation."
