An $80 million Taiwanese convertible offering one of the lowest conversion premiums and widest credit spreads on record was priced last night (Tuesday) via Credit Suisse First Boston. However, getting a deal done for Macronix is likely to be considered as something of achievement given that the B+ rated company has the lowest credit standing in the Taiwanese convertible universe (rated or otherwise), was trading at over 1,000bp over Libor only three months ago and the tech sector is show few signs of a re-bound.
The lead consequently devised as equity like structure as possible, with a low conversion premium and short call feature. Terms comprise a five-year final maturity and zero coupon, annual puttable structure with a 3.52% conversion premium to the stock's NT$11.65 spot close. It was marketed under a 3% to 12% range and converts into common shares.
There is a first call option after nine months subject to a 125% hurdle and after 18 months subject to a 120% hurdle. With par redemption, the first put option in year one is priced at par, then at 102% in year two, 104% in year three and 106% in year four. There is also a special re-set at the option of the issuer, which falls 30 days prior to each put option for a period of seven consecutive trading days. This sets the conversion price to the lower of an average closing price of 10,15 or 20 days and has a floor of 90.9% in year one, 89.1% in year two, 87.4% in year three, 85.8% in year four and 84.2% in year five.
Underlying assumptions comprise a bond floor of 93.7% based on a credit spread of 500bp over Libor or 92.7% based on 600bp. Taking the first assumption, theoretical value is priced at 112.5% and implied volatility at 20.6%. This is based on zero dividend, zero stock borrow and a 50% volatility assumption.
Observers comment that the deal was only able to happen because the company's credit spreads have come in about 300bp since November and a couple of asset swaps out to one-and-a-half years have recently been seen in the market. But since there is no borrow and little asset swap, they add that the deal had to be sold on an outright basis.
"Basically this deal offers a slightly out-of-the-money option, with virtually no credit protection, but a one-year put," one banker comments. "However, the company demonstrated that it does have the cash flow to meet the re-financing risk after the first year."
A year ago, by contrast, Macronix was rated BB and able to price a $150 million convertible with a credit spread of 375bp over Libor. This deal, led by Deutsche Bank and Merrill Lynch had a coupon of 0.5%, and a two-and-a-half-year put at a price of 107.845% to yield 3.55%. There was a conversion premium of 20% to a spot close of NT$26.1.
This year, although Macronix has not kept pace with overall gains on the TWSE, it has still derived some benefit and is up about 8% year-to-date to trade on a current book value of about 1.6 times forecast 2003 earnings. Upon full conversion the new deal accounts for about 6% of the company's $1.24 billion market cap.
Bankers say about 35 accounts participated in the book, with a rough geographical split of 25% Asia, 35% Europe and 40% offshore US.
