Another finely priced convertible was completed on Friday as the equity-linked market continued to perform strongly and stock market recorded its second largest day of net inflows by foreign investors ever, with $470 million recorded.
Lehman Brothers led a $90 million transaction for King Yuan Electronics, the company's first true offshore deal following an earlier dollar denominated deal by National Securities.
The only variables during the launch period were the conversion premium, which was marketed at 16% to 25% and the put option, which was marketed at 20 to 24 months. The latter was left unfixed because the company was keen to extend the maturity as far as it could, but as a debut and relatively unknown issuer was unsure whether the market would accept anything more than an annual rolling put structure.
However, books closed ten times covered within the space of two hours and because allocations were very thin, most of the 148 accounts that participated were happy to hold the bonds on an outright basis. Geographically there was a split of 40% Europe, 35% Asia and 25% US.
Final terms comprised a five-year maturity with a par in par out structure and zero coupon to give a zero yield. The first put falls after two years and annually thereafter, with the call option fixed at 18 months subject to a 125% hurdle.
The conversion premium came in towards the lower end of the range at 17% to the stock's NT$37.5 close and there is also a conversion price re-set after nine months and every year thereafter with an 80% floor (subject to the new rules in Taiwan).
The deal also has a $10 million greenshoe. There is no other syndicate.
Underlying assumptions comprise a bond floor of 89%, implied volatility of 33.6% and theoretical value of 100.5%. This is based on a credit spread of 375bp over Libor, 5% borrow cost, full dividend pass through and historic volatility of 35%.
For such an unknown borrower and stock with no borrow, 89% is a very punchy bond floor. Had the company had to fix the put option at 20 months, it would have been a more reasonable 92.2%.
However, the conversion premium is relatively low by recent standards from Taiwan and particularly when the re-set is taken into consideration. King Yuan has a market capitalization of roughly $760 million and has returned 125% over the past 12 months.
Most of this upside has come in the last three to six months, however, with the stock rising 97% on a six-month basis and 13% on a one-month basis.
At the end of first day's trading in London, the deal was bid at 102% to 103%.
