The Taiwan equity-linked sector produced $420 million of issuance on Friday with the completion of a $250 million convertible for Taiwan Cement via ABN AMRO and a $170 million convertible for Mega Financial Holdings via Citigroup, Lehman and Morgan Stanley.
For Mega, a new transaction marked a relatively swift return to the convertible market following the completion of a $600 million deal last September. Both of its issues stem from the group's need to rid itself of outstanding Treasury shares ahead of the government's cut-off date and on full conversion account for roughly 95% of the total.
Mega's September 2005 transaction provided a close pricing benchmark for its new August 2005 deal and with the benefit of strong liquidity, the new deal was able to price through the old.
Terms comprise an issue price of par, zero coupon and redemption price of 99.065% to yield minus 0.625%. Because of the short-dated structure, there is no put option and a 12 month call with a 130% hurdle.
The only variable was the conversion premium, which was marketed on a 22.50% to 25% range and priced at 25% to the stock's NT$22.10 close on Friday. The deal also incorporates a re-set at the end of December 2004, subject to an 80% floor and the new SFC rules in Taiwan.
Underlying assumptions show a bond floor of 95.2%, implied volatility of 30% and theoretical value of 98.1%. This is based on a credit spread of 85bp, 5% borrow cost, full dividend pass through and 24% volatility assumption.
Observers say books closed 16 times oversubscribed within an hour-and-a-half of launch, with participation by over 200 accounts. By geography, there was said to have split fairly evenly between the three regions.
Although there is plenty of asset swap available, specialists say most accounts wanted to take the deal on an outright basis and like many recent CB's viewed it as a pure equity play on a post election rally. Year-to-date, Mega is up 8.33%.
Its outstanding September 2005 deal was trading on a conversion premium of 4.1% on Friday, a negative yield of 10.19%, a bond floor of 97.2% and implied volatility of 26.10% according to dbconvertibles.com. However, given the old deal was bid at 111.25% to 111.75%, accounts would typically accept tighter terms in order to play a new par bond.
Terms for the new deal also show how pricing power has moved in issuers' favour since Mega last came to market when Lehman and Morgan Stanley struggled with a large $600 million offering that ended up being re-priced below par. Terms on the earlier deal gave investors fair value above par and a much cheaper volatility play.
Pricing came at 99.625% with redemption at 99.80%, a yield of minus 0.10% and 22.56% conversion premium. The bond floor was valued at 96.2%, with implied volatility of 19.7%, theoretical value of 101.7%, credit spread of 95bp and 24% vol assumption.
Taiwan Cement
Friday also saw the launch of a debut issue for Taiwan Cement. The new deal gave investors diversification away from steady parade of tech and FIG issuers, but as a relatively unknown company there was less asset swap.
Terms comprise an issue price of 103.50%, zero coupon and redemption at par to yield minus 0.68%. Having marketed the deal on an 18.4% to 24.7% conversion premium, pricing was settled at 20% over the stock's NT$22.68 close.
There is also a put option in September 2005 at par and a call option in March 2007 subject to a 130% hurdle.
Underlying assumptions show a bond floor of 92%, implied volatility of 34% and theoretical value of 102%.
These assumptions are based on a credit spread of 150bp over Libor, 5% borrow cost, full dividend pass through and 100-day volatility of 40.5%.
Books are said to have closed about four times covered, with participation by roughly 100 accounts. By geography, the book split 25% Asia, 60% Europe and 15% offshore US.
Aside from its debut status, Taiwan Cement needed slightly more palatable pricing than Mega because the deal equates to about 17% of the company's enlarged share capital compared to roughly 2% for the FHC.
Taiwan Cement has also had a good run, with its share price up 5% on the day of pricing, 15% year-to-date and about 50% on a 12-month basis.
