Taiwan’s Hon Hai Precision Industry, the world’s largest manufacturer of electronic components, raised $1 billion on Thursday evening from the sale of a convertible bond that has been in the works since late last year. The company, which makes components for a variety of products including Apple’s iPhone and iPad, initially wanted five-year debt, but has been unable to find support in the market and has had to re-file with the regulators twice – each time shortening the potential maturity. The latest filing suggested either a five-put-three deal or a straight three-year offering.
The CB, which was arranged by Credit Suisse and Standard Chartered, finally came as a three-year deal with no put, but a one-year issuer call which some investors referred to as “unfriendly”. It was also offered with a zero coupon, zero yield and a fixed 30% conversion premium over Thursday’s closing price of NT$117.50.
Given the lead time, the market was surprised to see the deal launch on Thursday as Hong Kong was closed for the Chinese National Day on Friday and many Hong Kong-based investors and CB specialists had already taken off for the long weekend. However, sources say the company was likely acting on the back of China Unicom’s well-received $1.8 billion CB earlier in the week and, once the secondary CB market started to soften on Wednesday and Thursday, it may have worried that the window for large deals was closing or that additional supply would lead to more investor-friendly terms. China will be on holiday until Friday this week and bankers are generally expecting primary market activity to be thinner during this period.
Some sources argued that the issuer may have been able to get better terms if it had offered the deal on a more “normal” day – there was a lot of noise in the market that Hon Hai might come last Tuesday and many were surprised that it didn’t go for it then. However, it is hard to see how much better a trade it could have got, given that it already defied market expectations that the deal would come with a small back-ended yield of 25bp-50bp. It may have been able to add another few percentage points on the premium, but the difference would have been minimal.
Aside from the timing, the deal also became a talking point as the bookrunners went out with a message to investors less than 30 minutes after the 7.30pm launch, saying the deal was fully covered. Given the size of the offering, this seemed virtually impossible, especially in light of the upcoming holiday, and immediately raised the question of whether the two bookrunners had decided to hold on to some of the bonds themselves.
The CB was offered slightly below par in the grey market, although that isn’t unusual for deals where multiple banks bid for the mandate and the decline wasn’t large enough to conclusively suggest that the deal was struggling.
Adding to the scepticism, however, was the fact that the investor community at large was somewhat nervously waiting for the US jobless claims data later that evening for a better gauge of the status of the world’s largest economy and wasn’t expected to be keen to make large commitments just ahead of that.
It also wouldn’t be too surprising if the two bookrunners had stepped in and bought part of the deal to enable the issuer to print and to show their commitment to the market. Standard Chartered is in the process of building an equity-linked franchise, and Credit Suisse hasn’t brought a CB to market since mid-May. The Swiss house also had a mixed reception for several of its deals earlier this year. Meanwhile, the availability of asset swaps meant the downside risks of holding a portion of the bonds would have been limited.
But sources close to the two banks said the deal was fully placed with external accounts and that about 50 investors came into the transaction. The allocations received by some investors also suggested that the banks weren’t in any case left with a large amount of bonds when the order books closed at 9pm Hong Kong time. One observer argued that the deal had been public for such a long time that the banks would have had a good grasp of what investors wanted, and the asset swaps made it easy for investors to commit quickly. Also, Friday was not a holiday in Europe or Singapore, which are also home to many CB investors.
Other sources noted that it would have been difficult for the bookrunners to get firm pre-deal commitments (referred to as wall crossings) from a large number of investors given that there were so many banks vying for the mandate, but said there was a spike in interest just after the US jobless data came out and showed a larger-than-expected decline in weekly claims.
The CB opened below par on Friday, but edged slightly higher in thin trading during the day and closed at about 100.25, while Hon Hai’s Taiwan listed stock fell 2.6% to NT$114.50. But given the Hong Kong holiday on Friday, it is difficult to draw many conclusions from that. A better indication of the real demand for the bonds is expected today as CB specialists return from their long weekend break.
The deal was marketed at a credit spread of 130bp, a stock borrow cost of 50bp and a full dividend pass-through. The modelling also assumed a stock slide of 2% to 3% in the wake of the deal. This resulted in a 94% bond floor and an implied volatility of about 25% -- significantly higher than the low-20s vol achieved by China Unicom a few days earlier. At the time of the Hon Hai issue, Unicom’s implied vol had risen to about 24%, however.
Given the lack of a coupon and a yield, outright investors were not that interested in Hon Hai and about 70% of the deal was said to have gone to hedge funds, which liked the fact that there is plenty of stock borrow available at a reasonable cost. As mentioned, there was also quite a bit of asset swaps available, both in the market and provided by Credit Suisse and Standard Chartered. Some sources said there was enough asset swaps to cover 75% of the deal, while others estimated the amount to about 50%.
With the Hon Hai CB having been in the works for so long, the banks interested in arranging the deal a couple of months ago formed three consortiums to make the bidding process a bit easier. Credit Suisse and Standard Chartered were bidding together with Deutsche Bank and Mizuho, although when the deal launched the latter two were not included on the term sheet. Sources suggested that they may not have been able to get their internal approvals in place quick enough or for a large enough size to participate on equal terms and thus were forced to drop out, which sounds strange given how well flagged this deal was. Indeed a separate source said Deutsche Bank, at least, had chosen to drop out as it wasn’t comfortable with the risk-reward ratio when considering the final terms together with the fee and the long weekend ahead.
A second consortium comprised DBS and Morgan Stanley, while Bank of America Merrill Lynch bid together with Barclays, Citi and Nomura.
