A new name entered the convertible bond market on Thursday, with Merrill Lynch leading a $100 million deal for Hsinchu International Bank.
Like KGI Securities and Fuh Hwa before it, the bank opted not to list its deal on a stock exchange. It also included a continent conversion premium feature in the deal, otherwise known as Coco. This was first used in Asia two weeks ago in a $400 million convertible for Tata Motor. It enables issuers to continue running EPS numbers that do not take account of the new stock coming on stream.
With a strike price of 110%, conversion can be triggered if the deal trades above the Coco conversion price for 20 out of 30 trading days in any given quarter. At the end of each quarter, the hurdle is lowered, amortising down to par by the time the deal hits its two-year put date.
Final terms for the five-year were set towards the bottom end of the range. With an issue price of par and zero coupon, the transaction has a put option in year two at 99.4% and a put option in year four at 98.8%, with final redemption at 98.51% to yield minus 0.3%.
The deal was initially marketed on a yield of minus 0.75% to minus 0.25%.
The conversion premium was set at 33% to the stock's NT$18.60 spot close, again the lower end of a 32.5% to 37.5% range. There is also a two-year call option with a 120% hurdle.
Underlying assumptions comprise a bond floor 91%, implied volatility of 39% and theoretical value of 103%. This is based on a credit spread of 180bp over Libor, zero dividend, zero borrow and 100-day volatility of 47.4%.
In many ways the deal is quite similar to a recent CB by Taishin Financial Holdings, currently trading at 108%/109%. This had an 18-month final maturity and a lower conversion premium (14.29%) and more aggressive yield (minus 0.75%).
Indeed, Hsinchu has achieved the highest conversion premium of any Taiwanese commercial bank to access the market. Only venture capital investor CDFHC has come higher with a 35% premium.
Fund managers say the order book closed about three times covered with participation by about 75 accounts. Very little asset swap demand was reported, since accounts were buying into the bank's equity story.
Year-to-date, Hsinchu is one of the best performing FIG stocks in Taiwan. Having started the year around the NT$14.50 level, it hit a high of NT$22.50 in late February after it revealed it was in exploring potential areas of co-operation with an unnamed Hong Kong bank.
It is currently trading on a fairly low price-to-book valuation of 1.2 times 2004 earnings. Taiwan Ratings recently upgraded Hsinchu from BBB- to BBB.
In a ratings release it said the upgrade reflected the bank's, "enhanced financial profile, particularly its consistent improvement of asset quality. The ratings continue to reflect the bank's established franchise in the Taoyuang, Hsinchu and Miaoli (THM) regions, which should provide it with adequate funding and business opportunities over the medium term.
"Counterbalancing factor," it added, "is the bank's relatively weak capitalization, implying limited cushioning in times of financial stress."
As of September 2003, NPL's stood at 7% on a three-month past due basis, higher than the industry average. Provisioning, however, amounted to just 20%.
